1998 Ruling 9819613 - SUPPLEMENTAL RETIREMENT PLAN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether an unfunded supplementary retirement arrangement results in current taxation.

Position: No.

Reasons: Recording of a book reserve is not considered to be a taxable event. These pension benefits are taxable when received.

XXXXXXXXXX
XXXXXXXXXX 3-981961
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Request for Advance Tax Ruling
Supplemental Retirement Plan of XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

DEFINITIONS AND ABBREVIATIONS

In this letter, unless otherwise expressly stated or the context otherwise requires:

"Act" means the Canadian Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"Canadian Corporation" has the meaning assigned by subsection 89(1);

"Eligible Compensation" for a Year means the base salary plus any annual discretionary bonus, if applicable, paid to an Employer’s employee, and excluding commission, sales bonus, share compensation and any other form of compensation;

"Employer" means XXXXXXXXXX;

"Plan" means the supplemental retirement arrangement of Employer;

"RRSP" (or "registered retirement savings plan") has the meaning assigned by subsection 146(1);

"RRSP Dollar Limit" has the meaning assigned by subsection 146(1);

"SDA" (or "salary deferral arrangement") has the meaning assigned by subsection 248(1);

"Year" means a calendar year.

RELEVANT FACTS

1. Employer is a Canadian Corporation.

2. Employer’s address is XXXXXXXXXX.

Employer’s Tax account number is XXXXXXXXXX.

Employer deals with the XXXXXXXXXX Tax Services Office located at XXXXXXXXXX, and files its tax returns with the XXXXXXXXXX Tax Centre.

3. Employer currently maintains a group RRSP entitled XXXXXXXXXX ("Group RRSP") for its employees. Employer contributes from 3% to 15% of an employee’s annual earnings, depending on length of service with Employer, to the Group RRSP, up to the limits for tax-assisted retirement savings.

4. The limits in the Act on tax-assisted retirement savings unduly restrict the amount of retirement savings that the employees may accumulate in order to provide an adequate retirement income, calculated on the basis of a specified percentage of pre-retirement compensation.

PROPOSED TRANSACTIONS

5. Employer proposes to establish the Plan, after receiving a favorable ruling, for each current member of the Group RRSP (the “Participant”) who meets the following criteria:

a) the Participant is in good standing with Employer and holds at least the position of vice-president;

b) Employer contributions to the Group RRSP for the Participant would otherwise exceed the RRSP Dollar Limit for the Year; and

c) the Participant is designated by Employer as being entitled to participate in the Plan.

6. The Plan will operate as follows:

(a) Under the terms of the Plan, Employer proposes to establish and maintain in respect of each Participant a notional account (the “Account”). Subject to paragraph 6(b) below, every Account will be credited with notional amounts representing both contributions made by Employer (the “Contributions”) and notional earnings (the “Earnings”) recorded thereto.

(b) The notional amounts credited to the Plan shall be recorded as a book reserve of Employer. The Plan shall not be prefunded or set aside any funds in any manner and there shall not be any security or any guarantee amount established in respect of such notional amounts.

(c) A Participant will not be permitted to contribute to his or her respective Account.

(d) A Participant’s Account will not entitle the Participant or the Participant’s beneficiary or estate, as the case may be, any right to receive payments under the Plan.

(e) The Contributions amount which will be credited by Employer to each Participant’s Account, for a Year, shall be determined as the amount of (A) minus the amount of (B) where:

(A) equals 15% of the Participant's Eligible Compensation for the Year; and

(B) equals Employer's contribution to the Participant's account under the Group RRSP.

(f) Notwithstanding paragraph 6(e) above, Contributions to each Participant's Account for a Year shall not exceed $XXXXXXXXXX less the Participant’s RRSP Dollar Limit for the Year.

(g) Employer shall credit a Participant’s Account with the amount of Contributions on XXXXXXXXXX of each Year. In the event that a Participant dies, becomes disabled, or terminates or retires from Employer, at any time before XXXXXXXXXX of a Year, subject to paragraph 6(i) below, Employer shall credit the Participant’s Account on the date of the Participant’s death, disability, termination or retirement as the case may be.

(h) Subject to paragraph 6(b) above, the Earnings credited to a Participant's Account shall be recorded on a mark to market daily basis. The Earnings shall equal the rate of return, including gains, losses and dividends, on the notional investments (the “Investment”) selected by the Participant. Such Investment choices shall be investments in one or more investment funds selected by Employer from time to time.

(i) If the Participant fails to select an Investment choice, his or her Account shall be recorded with Earnings of a money market fund selected by Employer. A Participant shall be permitted to change his or her Investment option once every Year on a date selected by Employer.

(j) Employer shall not be under an obligation to provide any benefits under the Plan in respect of a Participant until the occurrence of one of the following events:

(A) Death of the Participant prior to retirement and the Participant has been employed by Employer or any person related to Employer for five or more years of continuous service.

(B) Loss of an office or employment of the Participant, prior to retirement, either voluntarily or involuntarily, from Employer or any person related to Employer and the Participant has been employed by Employer or any person related to Employer for five or more years of continuous service.

(C) Disability of the Participant and the Participant ceases to be an employee of Employer or any person related to Employer on or after age 55 and the Participant has been employed by Employer or any person related to Employer for five or more years of continuous service.

(D) Retirement of the Participant from Employer or any person related to Employer on or after age 55 and the Participant has been employed by Employer or any person related to Employer for five or more years of continuous service.

(k) Upon the termination or the disability of a Participant, the Participant shall be entitled to the balance in his or her respective Account. The balance of the Account will be paid to the Participant in the form of a single lump sum payment, subject to withholding of income tax.

(l) Upon the retirement of a Participant, the Participant shall be entitled to the balance in his or her Account. The balance of the Account will be paid to the Participant in the form of a single lump sum payment or XXXXXXXXXX monthly payments, as elected by the Participant. If the Participant elects installment payments, Earnings would continue to be credited to the remaining balance of the Account. All amounts paid to the Participant will be subject to withholding of income tax.

(m) Upon the death of a Participant, the remaining accumulated amount in the Participant’s Account shall be paid to the Participant's beneficiary or estate in the form of a single lump sum payment, subject to withholding of income tax.

(n) In the event of a Participant’s death, disability, termination or retirement, prior to the completion of at least five years of continuous service with Employer or any person related to Employer, no amount will be payable to a Participant.

PURPOSE OF THE PROPOSED TRANSACTIONS

7. Employer proposes to establish the Plan for Participants in order to meet the following objectives:

a) to provide an opportunity for such Participants to earn an adequate level of retirement income; and

b) to provide the benefits under the Plan such that they are not taxable to the members (and not tax deductible to Employer) until paid.

OTHER INFORMATION

8. To the best of your knowledge and that of Employer none of the issues in respect of which rulings are herein requested is:

(a) in an earlier return of Employer or a related person,

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of Employer,

(c) under objection by Employer or a related person,

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(e) the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

9. To the best of your knowledge and Employer' s knowledge, this request for an advance income tax ruling contains all the relevant facts and provides a full and fair presentation of the proposed arrangement in respect of the rulings sought.

RULINGS GIVEN

Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, that the proposed Plan is established in the manner described in paragraphs 6(a) through (m) above, we rule as follows:

A) No amount will be included in the income of a Participant to whom the contributions relate under subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subsection 56(2) as a result of the recording of Contributions under the Plan as a book reserve of Employer.

B) The recording of Contributions under the Plan as a book reserve of Employer does not constitute an SDA and therefore does not confer a taxable benefit on the Participants to whom the Contributions relate, under subsection 6(11).

C) The recording of Contributions under the Plan as a book reserve of Employer and the annual crediting of Earnings to the book reserve does not constitute an investment contract as that term is defined in subsection 12(11) and therefore no amount is included in the income of the Participant to whom the contributions relate under subsection 12(4).

D) No amount will be included in the income of a Participant to whom the contributions relate under subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subsection 56(2) as a result of the selection of Investment choices by the Participant.

E) All benefit payments under the Plan by Employer to the Participants will be taxable to such Participant under subparagraph 56(1)(a)(i) in the year in which the payments are received.

F) All benefit payments under the Plan by Employer to the Participants will be deductible in computing Employer’s income for tax purposes in accordance with section 9, subject to the limitations in paragraph 18(1)(a), subsection 18(9) and section 67.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 of December 30, 1996, issued by Revenue Canada Taxation, and are binding provided the proposed transactions are completed and effective within six months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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