7 November 1991 Income Tax Severed Letter - \"Wage Protection Trusts\"

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:

Re: "Wage Protection Trusts" (the "Trust")

This is in reply to your letter dated May 28, 1991 wherein you requested our general comments regarding the establishment of a Trust to protect corporate directors and officers from the possible future liabilities proposed under Ontario Bill 70's Employee Wage Protection Program. Since it may not be possible or cost effective for an employer to insure the possible liability which may exist as a result of the Province of Ontario's proposed amendments to the Employment Standards Act, corporations ("employers") will be seeking methods to minimize the potential risks to their officers and directors resulting from the proposed legislation thus increasing their chances of attracting and retaining competent officers and directors.

You are of the view that employers should be allowed to establish a Trust to protect officers and directors who may be ordered by an Ontario employment standards officer ("Standards Officer") to pay unpaid wages and/or vacation pay to an employee or employees of the corporation. Where an order is issued by the Standards Officer, the trustee of the Trust would make the necessary payment from the Trust funds to the particular officer or director of the corporation, who in turn would pay the employee pursuant to the order. Under the terms of such a plan, the employers would make such contributions to the Trust as are reasonable in the circumstances.

You submit that, under the plan, contributions would be made by the particular employer to a trustee (custodian) in connection with benefits that may be received by a person on the loss of an office or employment of a taxpayer and, as such, you believe that the Trust would qualify as a "retirement compensation arrangement" ("RCA") as that term is defined in subsection 248(1) of the Income Tax Act (Canada) (the "Act"). You are also of the view that a payment made by the Trust to an officer or director in respect of an employee's loss of office or employment would be taxable as an RCA benefit to the employee who will ultimately receive the funds from the officer or director of the corporation.

Our Comments

For discussion purposes, we have assumed that the officer or director would, generally, become liable for unpaid wages under the provisions of the Employment Standards Act ("Employment Act") when the corporation has become insolvent and the only recourse available for the employees is to seek payment from the officers and directors of the corporation.

Generally, an RCA is an arrangement under which contributions are made by an employer to a custodian to fund an amount to be paid to an employee in connection with benefits to be received on, after or in contemplation of

• (a) any substantial change in the services rendered by the employee,
• (b) the employee's retirement, or
• (c) the loss of the employee's office or employment.

Although it would be essential for the Department to review all of the facts in each particular situation to determine whether or not a particular arrangement constitutes an RCA for purposes of the Act, it is our view that the arrangement described above would not appear to satisfy the conditions required under the definition of an RCA in subsection 248(1) of the Act. In our view, the payments to be made to the custodian by the employer are being made to indemnify the directors and officers of the employer in respect of their personal obligations under the proposed amendments to the Employment Standards Act of Ontario and are not made in connection with benefits that are to be or may be received or enjoyed by an employee of the employer on, after or in contemplation of any of the circumstances set out in (a), (b) or (c) above.

In addition, we note that the terms of the plan allow the custodian to make payments for regular wages, overtime wages, vacation pay and holiday pay earned by the employee which has not been paid by the employer. We do not believe that the payment of regular wages, overtime wages, vacation pay and holiday pay earned by the employee would constitute a benefit resulting from the loss of the employee's office or employment for purposes of the definition of an RCA found in subsection 248(1) of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to different conclusions. The foregoing opinions are given in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.