7 July 1991 Income Tax Severed Letter - Whether a supplementary pension fund could be created and not be considered to be a retirement compensation arrangement

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.

Dear Sirs:

This is in reply to your letter of May 6, 1991, addressed to our Registration Directorate and referred to us for reply.

You have asked if a supplementary pension fund could be created and not be considered to be a Retirement Compensation Arrangement or "RCA", if the employer's contributions thereto are included in the participating employees' income at the time of the contribution and any amounts of related investment income are included in income as they are earned. You also asked if our opinion would differ if the employees were not permitted to withdraw any amounts from the fund prior to their retirement.

Before the enactment of the RCA legislation, a trusteed but unregistered pension plan would have been either an employee benefit plan (an "EBP") or an employee thrift plan depending on who was making contributions under the terms of the plan. This issue is discussed at length in the Department's Interpretation Bulletin IT-502 and in particular at paragraph 32 thereof. A copy of the bulletin is enclosed.

With the introduction of the RCA legislation, the law pertaining to unregistered pension plans was substantially altered with one effect being that the provisions for EBPs do not apply where the provisions for RCAs do. The revised law, however, does not change the basis for differentiating an EBP or an RCA from an employees' thrift plan. Accordingly, the comments contained in paragraph 32 of the bulletin still have relevance. Restated to account for RCAs, that paragraph would state:

"Typically the terms of an employee savings or thrift plan provide that the employer's contributions will be a percentage of employee contributions. There may be a vesting period and withdrawal restrictions. Where such a plan is administered by a custodian, it will normally fall within the definition of [either] an [EBP] and be subject to the [EBP] rules as discussed above [in the bulletin] [or an RCA]. However, an employee savings or thrift plan will not be an EBP [or an RCA] provided that the plan is structured in such a way that the employer's contribution is a payment of salary and is paid to the plan custodian at the direction of the employee..."

Notwithstanding the above general position, we must also note that if the creation of an employee thrift plan in lieu of an unregistered supplementary pension plan is undertaken for the purpose of reducing or avoiding taxes which would otherwise be exigible if the plan were an RCA and the avoidance is found to be a misuse of the provisions of the Income Tax Act (the "Act") or an abuse having regard to the provisions of the Act read as a whole, the creation of the plan and any contributions thereunder may, in our opinion, be subject to the provisions of subsection 245(2) of the Act.

We trust our comments are satisfactory to your needs.