21 May 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.

May 21, 1991

VANCOUVER DISTRICT OFFICE               Financial Industries
Enquiries & Office Examinations           Division
                                        P. Spice
                                        957-8953
Attention:  J.D.K. McGuire
            Chief
                                        Your file 1083-2
                                        7-911275

Retirement Compensation Arrangements

We are writing in reply to your memorandum of May 1, 1991,
concerning the use of letters of credit to fund retirement
compensation arrangements.  You reproduced the following question
submitted by the        24(1)24(1)       and asked for our advice.

Q.   14.  Employers are increasingly looking to various types of
          compensation arrangements.  One proposal involves setting
          up an unfunded supplemental plan.  As a means of
          providing security for the employer's undertaking of such
          a plan, a letter of credit is issued by a financial
          institution.  It is our understanding that Revenue Canada
          may treat letters of credit as a contribution to a
          retirement compensation arrangement.  Is this the
          Department's position and, if so, what is the basis for
          such a position?

If we were asked to respond to this question, our answer would be as follows:

Department's Position

Where a letter of credit is issued to a custodian in these circumstances, it is the Department's position that the fair market value of the letter of credit is a contribution to a retirement compensation arrangement. The amount of the contribution is equal to the fair market of the letter of credit which is a question of fact; however, such factors as the date the letter of credit becomes payable, the credit worthiness of the employer, the restrictions on payment, the intent of the parties to the transaction etc. would have to be considered.

We hope the foregoing discussion will assist you in responding to the query.

for Chief Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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