15 January 1991 Income Tax Severed Letter

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.

DATE January 15, 1991 TO A

Assessing 6 Enquiries                 FROM
 Directorate                            De  Financial Industries
 Returns Processing Division                Division
                                            Mary Pat Baldwin
                                            957-3499

Attention: Mrs. P. McLaughlin 
           Trust and S.E.R. 
           Assessing Section

                                      FILE
                                  DOSSIER  7-903186

SUBJECT: OBJET: XXXX

This is in reply to your memo of November 6, 1990 wherein you requested we review a copy of the trust agreement between XXXX (the employer) and a copy of the agreement between the employer and an employee and confirm that you are correct according to the Income Tax Act (the "Act").

After reviewing the agreements it appears that the plan was an employee benefit plan (EBP) prior to January 1, 1988 and as a result of the coming-into-force provisions of the definition of a Retirement compensation arrangement (RCA) in subsection 248(1) of the Act the plan became a statutory arrangement or January 1, 1988. In stating that the plan became a statutory arrangement on January 1, 1988 we are making the assumption that all agreements between the employee and the employer were established before October 8, 1986 and have not been materially altered since that date.

The Statutory Arrangement is deemed to be a separate plan independent of the existing EBP. The existing arrangement is deemed not to be an RCA within. the definition of the Act. A2-1 contributions made under the EBP after January 1, 1988 and all property that can reasonably be considered to derive from those contribution are deemed to be property held in connection with the statutory arrangement (RCA) and not in connection with the existing EBP.

In the agreement between the employee and the School District it states "The Employer shall also deposit all interest, which is earned by the funds held for the Employee as reinvestment in the said funds". At the 1985 Tax Conference, Revenue Canada stated its position with respect to the above situation as follows:

In order to be recognized as an income beneficiary, the employer must have unrestricted right, title and use of the income allocated to the employer. A payment that is conditional upon its repayment to the trust would not be accepted as a bona fide payment by the trust; therefore it is the Department's position that such income should be taxed in the hands of the trust and not in the hands of the employer.

Notwithstanding that the payments from the EBP trust to the employer are not deductible from the income of the EBP trust, the recontributions by the employer to the plan made after December 31, 1987 will be considered to be contributions to an RCA and therefore subject to withholding provisions of paragraph 153(1)(p) of the Act.

XXXX has indicated that they wish to amend the employee - employer contract to state that the employees will be paid all income from the plan annually. It is our view that the ultimate beneficiaries under the plan are and will remain, after the proposed amendments, the employees and the proposed amendment would not cause the plan to lose its "grandfathered EBP" status. With respect to the timing of the plan's income to the employees, we would not disagree with the allowance of a deduction to the trust for their 1986 year of 1988 income paid to the employees in 1969 where this is being done on an administrative basis as part of the process of bringing the plan "on-side" with the Act.

Based on the above discussion and facts we agree with your interpretation of the income tax consequences of the Act.

Yours truly,

for Director Financial Industries Divisor Rulings Directorate