5 July 1990 Income Tax Severed Letter 901033 F - Termination of a Supplementary Unemployment Benefit 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.

Subject: Termination of a Supplementary Unemployment Benefit Plan (a "SUB plan" and the Disbursement of the Plan Funds

This is in reply to your memorandum of May 28, 1990 in request of our comments concerning the disbursement of funds on the termination of a Sub plan.

In the case at hand, 24(1)

As noted by you, Information Circular 72-5R states that a SUB plan must not provide for the transfer of funds to an employees' welfare fund on wind-up but may be used as otherwise accepted by the Department.  24(1)

24(1)

Your concerns with regard to this plan are that the funds are to be disbursed in a manner that is not acceptable according to our current administrative procedures and that the transfer is to another non-tax paying entity.  In addition, although 24(1)

Our Comments

The purpose of a SUB plan is fairly narrow and the requirements set out in Information Circular 72-5R are intended to ensure that a SUB plan can only be utilized to fulfil that purpose and cannot be deliberately drafted to provide other unintended benefits.  In particular it was intended that such plans not be used to allow the employer to deduct, on a prepaid and/or excessive basis, contributions to such plans as health and welfare plans where such contributions are otherwise limited by specific provisions of the Act. Accordingly, a plan cannot provide in its terms for the transfer of funds to an employee's welfare fund and an amendment should not be allowed during or at a plan's termination to so provide.  In our view, however, this should not apply to prohibit the termination of a plan in a normally unacceptable manner where the plan does not provide for such a basis and there is no viable alternative basis on which to terminate.

In the present case, 24(1)

We note that no employer will receive or could have expected to receive the unintended consequence of this arrangement. We also note that no 24(1) will receive any additional untaxed benefits as a consequence of the planned use of the funds.  The limitation of the tax-free portion of death, disability and health insurance benefits to employees, through union plans, is controlled through specific provisions of the Act and will not be expanded upon through this new source of funding.  24(1)

With respect to your concern as to the 24(1) actual use of the SUB funds, while it will always remain a possibility that they could divert the funds, such an action would be contrary to the  24(1) and this could result in serious non-tax consequences to them.  Accordingly it is our view that you should not be overly concerned with this when preparing your decision.

for DirectorFinancial Industries DivisionRulings Directorate