10 December 1991 Internal T.I. 9123717 F - Employee Benefit Plan — Employer Contributions

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.

7-912371 24(1)        (the "Company")

Employee Benefit Plan (the "Plan") Employer Contributions for 1983, 1985, 1986

We have been asked to reply to your memorandum of August 16, 1991 to the Audit Applications Division concerning the above-noted matter.  A copy of the Company's employee benefit plan was enclosed with the memorandum, together with a graphic sheet, and copies of a TORT Referral form and attachment, CCH commentary on subsection 18(10) of the Income Tax Act (the "Act"), Tax Avoidance report (undated), letters of January 31 and April 22, 1991 from the Company's accountants, 24(1)your letter of November 19, 1990 to the Company, and pages 6 through 9 of the T20 Report.  You asked for an opinion on three issues which are set out below with our responses thereto.

Please advise if:

(1)      the amounts are deductible.

It is our view that no contributions have been made to an employee benefit plan ("ebp") and, therefore, no deduction under subsection 18(10) of the Act can be taken.  Both the definition of employee benefit plan in subsection 248(1) and the deduction described in subsection 18(10) of the Act use the same words (except for number), i.e. "contributions are made"/"contribution is made".  Not only is a deduction denied until the employer actually pays the amount into the plan, we would argue that no plan exists unless it is funded.  See this position set out in paragraph 5 of Interpretation Bulletin IT-502, although its context limits its application to situations where there is no third party custodian.

(We note that the Plan terms include an acknowledged settlement of 24(1) (paragraph 24(1)). We assume, given the background information you have provided, that there was in fact no settlement and that the acknowledgement is false.  If the 24(1) was settled and loaned back to the Company, the Plan is funded and the deduction for at least that year is valid.)

The Company's accountants argue in their April 22, 1991 letter that since paragraph 18(1)(o) deals with both "paid and payable" contributions, subsection 18(10) must provide for an exception covering both types of contributions.  In our view, the denial of a deduction under paragraph 18(1)(o) is stated in the usual broad language, while the exception is restricted to a narrow circumstance.  We also are of the opinion that the word "made" is the correct verb for the noun "contribution", whereas "paid" should be used in connection with "amount"; therefore, the difference in wording between the two provisions results from the choice of noun and not from any other legislative intent as alleged by the accountants.

(2)      if the (amounts) were paid now, when would they be deductible.

A deduction under subsection 18(10) can only be taken in the year in which the amount is paid.  Moreover, any amount paid in after 1987 relating to services rendered after June 1986 where the employer was not required to defer payment of the salary may be caught by the rules for salary deferral arrangements and, therefore, subject to the provisions of paragraphs 18(1)(o.1) and 18(1)(a) of the Act.  (Paragraph 18(1)(a) applies because non-resident salary deferral arrangements are not subject to the restrictions of paragraph 18(1)(o.1).) 

21(1)(b),24(1)

(3)      in view of the relationship of the beneficiaries...and the fact that one is a shareholder and the other an employee...and, further, that the services provided to the company quantumwise are suspect, would you consider the plan, in true sense, to be an 'Employee Benefit Plan' as contemplated in subsection 248(1) of the Act.

As we noted under (1) above, if no contribution has been made, no plan can exist within the definition of an ebp under subsection 248(1).  However, where a contribution is made so that the monies or other property contributed are no longer available to the employer for its own purposes, and the arrangement provides that payments are to be made to benefit employees or former employees, then, subject to the list of exceptions in the definition, an employee benefit plan exists.

We trust the foregoing comments will assist.

ChiefDeferred Income Plans SectionFinancial Industries Division