Subsection 207.5(1) - Definitions
//www.parl.gc.ca/HousePublications/Publication.aspx?DocId=5765988&File=41">: Subsection 44(3) of Bill C-45 introduces anti-avoidance rules, s. 207.5, for RCA advantages and prohibited investments. The amendment includes two exceptions, one of which is for promissory notes or similar obligations acquired before 28 March 2012. The exception allows for the terms to be amended to comply with s. 207.5 (i.e. so that the note provides periodic payments on commercially reasonable terms) without a deemed disposition arising. CRA states:
In our view, an amendment to extend the term of a debt obligation for a commercially reasonable period will not cause the transitional relief to cease to apply, provided
- (i) the debt has not yet been settled or extinguished,
- (ii) the amendment is made in 2013, and
- (iii) the new amortization period is consistent with the other terms of the debt obligation, the whole of which establish commercially reasonable payments of principal and interest at least annually.
It is also our view that the partial payment of a debt at maturity would not result in the loss of the transitional relief for the remaining balance, provided
- (i) the existing debt is not fully extinguished, and
- (ii) the remaining balance of the debt is subject to commercial terms that comply with the requirements of the transitional rule.
Does the concept of "advantage" in s. 207.01(1) apply to a split-dollar arrangement where the RCA holds the cash surrender value of the insurance contract and another person or entity holds the death benefit, with the holder of the death benefit adequately financing the mortality costs? CRA responded:
[I]t is possible that the concept of advantage as defined in subsection 207.5(1) would apply in certain circumstances to the situation presented. However … given that the terms and conditions of these types of contracts may vary significantly, we are unable to comment on the application of the concept of advantage to co-ownership agreements or split-premium life insurance arrangements.
Jillian Welch, "Retirement Compensation Arrangements: an Update on the Advantage Rule", Taxation of Executive Compensation and Retirement Special Pension Edition, Volume XVII, No. 3, 2013, p. 1074.
Targeting of loan-back structures (p. 1074)
The Department of Finance borrowed these rules as a mechanism to deal with certain so-called "loan back" structures involving RCAs that the CRA found offensive. In their simplest form, an employer would make a tax-deductible contribution to an RCA trust, [fn 4: Paragraph 20(1)(r)...] which in turn would remit 50% of the contribution to the federal government as a refundable tax. [fn 5: "Refundable tax" is defined in subsection 207.5(1) and required to be paid under subsection 207.7(1). Withholding and remitting requirements apply to contributions to the RCA trust – see paragraph 153(1)(p)] The RCA trust would then borrow from a third-party financial institution and in turn loan those funds to the sponsoring employer on terms that did not reflect "market" conditions in terms of interest rate, security and/or repayment terms.
Resulting impoverishment of RCA (p. 1074)
In some cases, the CRA believed the loan, in the future, could potentially impoverish the RCA in such a way that refundable tax paid by the RCA trust would be recoverable [fn 6: An election is available to permit refunds of the tax in specific situations – see subsection 207.5(2). In addition to the prohibited investment and advantage rules, the Act was amended to limit the availability of the election where the decline in value of the RCA property is attributable to a prohibited investment for, or an advantage in relation to, the RCA trust.] but no benefits would be paid by the RCA to its beneficiaries. Often, the RCA trust invested contributions to the trust in a life insurance policy on the life of a shareholder/employee, which was in turn pledged as security, together with the RCA trust's refundable tax account, for the loan to the RCA trust.
Advantage rule (pp. 1074-5)
Under the definition of "advantage," any benefit, loan or indebtedness that is conditional in any way on the existence of the RCA, other than certain enumerated exceptions (including a loan or indebtedness the terms and conditions of which are essentially arm's length), will be an advantage [fn 7: See the definition of "advantage" in subsection 207.5(1) of the Act.] In addition, any income or capital gain that is reasonably attributable, directly or indirectly, to a prohibited investment gives rise to an advantage. This latter inclusion is important as a prohibited investment acquired before March 29 is not subject to the prohibited investment tax, but advantages arising from such otherwise grandfathered investments can give rise to the advantage tax.
In finding that the advantage tax in s. 207.62 applied where a specified beneficiary of an RCA assigned their rights to receive distributions from the RCA in order to secure a personal loan, CRA stated:
By providing security to the lender by way of an assignment of their right to receive distributions under the RCA, the beneficiary was able to obtain a loan on more favourable terms than would otherwise be the case. Taking into account that the RCA custodian was party to the assignment and the RCA permitted the beneficiary to assign their rights under the arrangement, the purpose of which is to provide an income to the beneficiary in retirement, the favourable loan terms represent a benefit to the beneficiary. Since the benefit is conditional on the existence of the RCA, the advantage tax rules apply.
…[T]he advantage is the benefit derived from the security (that is, the favourable loan terms), not the loan itself. Consequently, the advantage tax is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax.
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|Tax Topics - Income Tax Act - Section 207.62 - Subsection 207.62(2) - Paragraph 207.62(2)(a)||FMV of pledging benefit equal to PV of interest savings||104|
An RCA trust acquires and holds a universal life insurance policy on the life of the individual who is the sole specified beneficiary of the RCA. The policy is an exempt policy under the life insurance policy taxation rules in the Act. The death benefit includes the cash value of the policy immediately before death. The amount of the death benefit under the life insurance policy is constant over the duration of the policy as the cash value increases each year, whereas the protection component correspondingly decreases each year. CRA stated:
[T]he amount of the protection component of the death benefit under the policy far exceeds the individual’s own entitlement to retirement benefits under the RCA. The amount also far exceeds a reasonable level of survivor benefits and there is no actuarial basis to support the amount as being reasonable. Upon the death of the individual, regardless of the individual’s number of years of service, salary history or age, the funds derived from the proceeds of the protection component of the death benefit (as well as the cash value…) would become available to the individual’s spouse (or the individual’s estate if the spouse predeceases the individual). That amount would be larger if the individual were to die during the early years of the life insurance policy.
Accordingly…the yearly life insurance coverage is a benefit enjoyed by the individual that is conditional on the existence of the RCA and therefore… is subject to advantage tax.
2013-0481421C6 concerned an RCA holding a life insurance policy that provided more than a nominal death benefit where, after indicating that the holding of the policy appeared to have little to do with providing for benefits under the RCA in relation to retirement, a loss of an office or employment, CRA concluded that the holding of such a life insurance policy by the RCA could give rise to an advantage.
CRA now considered an example of a private-corporation employer, which in addition to establishing a defined benefit registered pension plan (RPP) for all of its employees, also established a trusteed defined benefit supplementary pension plan (an RCA) for several key owner-managers, and which purchased exempt life insurance policies on the life of certain (but not all) plan members, and with the employer contributions (after the RCA refundable tax) being used both to fund the mortality charges and to accumulate cash within the policy. Benefits for those members whose lives were insured will be primarily funded by the RCA through withdrawals from the cash values on their life and using those funds to make payments to those members. On the death of an insured member, the death benefit under the life insurance policy will be retained in the RCA to fund benefits to the surviving spouse (if any) and/or fund benefits to other members of the plan (or surviving spouses) who continue to participate in the plan. Upon a future winding-up of the RCA, any remaining funds including any funds derived from the proceeds of life insurance death benefits will be returned to the employer on a taxable basis.
[I]f the survivor benefits under the RCA are in line with the survivor benefits under the RPP, and the amount payable under the life insurance policy on death of the insured does not exceed the amount reasonably required to satisfy the RCA survivor benefits payable in respect of the insured, then generally there would not be an RCA advantage. [However] there…[f]or example… would be an RCA advantage if the policy was acquired to, in effect, provide key-person coverage to indemnify the employer for potential loss of profits or additional costs that may be incurred in the event of the death of the insured. If the insured is a specified beneficiary of the RCA and does not deal at arm’s length with the employer, RCA advantage tax would arise in this situation.
[I]n the determination of the amount of the RCA advantage in each year…the cost of equivalent term-life insurance coverage based on insurance underwriting considerations such as the individual’s age, gender, and health would be a relevant factor.
A corporation is the owner and beneficiary of an insurance policy on the life of a senior executive officer, who is also a shareholder, which was acquired to provide key person coverage to indemnify the corporation for a potential loss of profits on the insured’s death. The corporation no longer needs the policy on the executive’s retirement, and it transfers the policy to him for no consideration at a time when the particulars are:
- Death benefit $1,000,000
- Cash surrender value $ 125,000
- Adjusted cost basis $ 50,000
- Fair market value $ 125,000
Without being queried on this issue, CRA stated:
Although there are certain exceptions in the "advantage" definition, a benefit arising from the RCA holding a life insurance policy is not among them.
It is not clear under what circumstances an RCA would be holding a life insurance policy that provides for more than a nominal death benefit. The holding of such a life insurance policy would appear to have little to do with providing for benefits under the RCA in relation to retirement, a loss of an office or employment, or a substantial change in services rendered. The holding of such a life insurance policy by the RCA could give rise to an advantage and, therefore, advantage tax under section 207.62… .
CRA considered, respecting an RCA trust with an employee as its sole beneficiary, that its “holding of a life insurance policy with life insurance coverage (death benefit) in a year is a benefit that is conditional on the existence of the RCA” and, thus, was a benefit described in para. (a) of the RCA “advantage” definition.
What then if the RCA trust transferred the policy to the employee and applied s. 207.5(2) to claim a refund under s. 207.7(2) on the basis that the RCA trust no longer holds property. The issue is that, under s. 207.5(3), s. 207.5(2) does not apply if any part of a decline in the fair market value ("FMV") of subject property of the RCA is reasonably attributable to an advantage in relation to the RCA trust - subject to the exercise of CRA discretion. Before commenting on this issue, CRA stated (in relation to the RCA strip charcterization):
[T]he payment for life insurance coverage reduces the FMV of the subject property of the RCA trust each year as the amount paid for this protection is not invested in property held in connection with the RCA trust. Consequently, this reduction in the FMV of the property of the RCA trust could represent an amount arising from an RCA strip if the other conditions in that definition are met... .
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|Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(3)||s. 207.7(2) refund might be generated where an RCA trust distributes a life insurance policy to its employee beneficiary||336|
A loan by the employer to the RCA, equal to the refundable tax balance, is used by the RCA will pay a lump-sum amount to an employee to terminate her participation in the RCA. The refundable tax received by the RCA on the distribution to her will be used to repay the loan in the following year. Is the loan a "contribution" under s. 20(1)(r) of the Income Tax Act (the "Act") and subject to "refundable tax" as defined in s. 207.5(1)? CRA responded:
[T]he determination of whether a transfer of property to an RCA trust constitutes a bona fide loan will depend on, among other things, the facts of the particular situation, the terms and conditions of the arrangement, and the law.
Where an employer directly acquires a letter of credit from a bank for the benefit of its employees, it will be considered to have established a retirement compensation arrangement and contributed the letter of credit to it. Although the amount of the contribution will be equal to the letter of credit at that time, persons in the financial industry have stated that the fair market value of the letter of credit at the time of its acquisition is its costs to the employer (generally the fee charged by the bank).
If assets are not specifically pledged as security for the RCA and can be used for other purposes or to satisfy other creditors, such security will not be considered as contributions to the RCA.
"Where a trust governed by an RCA obtains an LOC [Letter of Credit] and, in addition to the fee charged by the bank to the trust, the employer must pledge assets, the amount of contributions under the RCA, would, in our view, be equal to the lesser of the total of fair market values of both the LOC and the pledged assets and the face amount of the LOC." "In addition to the above, a contractual obligation by the company to prepay the amount of the LOC to the bank on demand would not constitute a contribution to the RCA in and of itself".
92 C.R. - Q.49
Where a registered pension plan has its registration revoked and thereby immediately becomes a retirement compensation arrangement, Part XI.3 tax will not generally be applicable to accumulated contributions and investment income as at the date of revocation.
88 C.R. - Q.30
All contributions to a RCA, whether from the employer or the employee, are included.
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|Tax Topics - Income Tax Act - Section 207.6 - Subsection 207.6(2)||30|
Jim Kahane, Uros Karadzic, Simon Létourneau-Laroche, "A Fresh Look at Retirement Compensation Arrangement: A Flexible Vehicle for Retirement Planning", Canadian Tax Journal (2013) 61:2, 479 – 502.
Refund mechanics (p. 485)
When the employer makes a contribution to an RCA, one-half of the contribution must be remitted to the CRA [fn 22: Subsection 207.5(1), the definition of "refundable tax," paragraph (a).] and placed in a refundable tax account (RTA). Similarly, one-half of the return generated by the invested portion of the assets must be transferred to the RTA. [fn 23: …paragraph (b).]
When benefits are paid from the plan, the funds are refunded from the RTA to the RCA at the rate of $0.50 for each $1 of benefit paid. [fn 24: … paragraph (c).]
In the event of termination of the plan, the assets in the RTA are refunded to the RCA. [fn 25: Subsection 207.5(2).]
Table 1 provides an illustration of how an RCA and RTA would work over a period of four years.
As noted above, the balance at the end of the year in the RCA and the RTA are equal, since one-half of all contributions and investment income must be remitted to the CRA. Upon termination of the RCA, the assets remaining in the RTA (if any) are refunded to the plan. However, the terms of the plan will dictate whether such surplus assets belong to the employer or to the plan members….
Letter of credit arrangements (p. 489-90)
…An alternative to using cash, where cash may not be available, is to obtain a letter of credit (LOC) from a financial institution. The LOC provides that in certain circumstances, such as the employer's failure to renew the LOC or to pay employee benefits, the bank that issued the LOC would pay the face value of the LOC into the RCA, fully funding the benefit. The employer would than owe the bank the face amount of the LOC. This arrangement provides security to the member while not requiring the employer to contributed directly to the RCA.
The LOC is typically renewed annually. The LOC is held by the RCA, and when the employer pays the annual tax-deductible fee to the bank for the LOC, an equal amount must be paid into the RTA. The LOC fee may vary depending on the credit worthiness of the employer. The face value of the LOC is usually determined on an actuarial basis, and it is meant to represent the amount sufficient to fully fund the pension promise.
Funds held in the RTA equal to the LOC fees may not be recoverable to the employer until many years later when the plan is terminated.
Manjit Singh, Jillian Welch, "Retirement Compensation Arrangements and the Prohibited Investment and Advantage Rules", Taxation of Executive Compensation and Retirement, Special Pension Edition, Volume XVI, No. 4, 2012, p. 1041: The article initially provides the following overview of the statutory scheme:
Generally, employers and employees are entitled to a deduction from income in respect of contributions they make to an RCA. [fn. 2: Paragraph 8(1)(o.2) of Act.] Plan members are not taxed on employer contributions made to the RCA. Instead, an RCA is liable to pay a "refundable" tax at the rate of 50% on the contributions it receives and on the net income and net capital gains it earns (referred to as the "refundable tax account"). [fn. 3: Subsection 207.5(1) of the Act, definition of "refundable tax."]
Plan members must include distributions from an RCA (typically in the form of retirement benefits) in income at the time of receipt. [fn. 4: Paragraphs 56(1)(x) or (z) of the Act.] In turn, distributions the RCA pays to its plan members will also generate a refund of tax to the RCA, from its refundable tax account equal to 50% of the amount of the distributions made in the year. [fn. 5: Subsection 207.5(1) of the Act, definition of "refundable tax."] …
Holdco (a taxable Canadian corporation) holds all the shares of Opco, as its only asset other than cash. Holdco’s common shares are owned by X and its preferred shares by Parent (a non-resident corporation). While Opco was still carrying on a business, it entered into “SERP Agreements” with executive employees of Opco (the “Pensioners”) pursuant to which it undertook the “SERP Obligations,” i.e., to pay supplemental executive pension benefits to each Pensioner (including a surviving spouse) respecting services rendered by the Pensioner in Canada. The Opco business has been discontinued, and its assets consist predominantly of cash.
Parent assumption of SERP Obligations
Pursuant to the terms of a Consent, Assignment and Release Agreement that will be entered into with each Pensioner, each Pensioner will permit Opco to assign to Parent, and Parent to assume from Opco, the SERP Obligations, and Opco will assign to Parent, and Parent will assume, all of the SERP Obligations for no consideration. Neither Parent, nor any other entity in the Corporate Group, will be required to, or will, “ear-mark” or segregate any of its assets, or purchase a specific asset to secure or fund the SERP Obligations.
Opco will transfer certain of its assets, if any, that have accrued gains to Holdco for cash consideration equal to the FMV of such assets so transferred.
Opco will be wound up so as to have s. 88(1) apply.
Holdco will be wound-up, so that:
a) Holdco will settle all of its liabilities.
b) Holdco will transfer sufficient cash deposits and other assets to Parent, to satisfy the liquidation entitlement of the preferred shares.
c) To the extent that there are any remaining assets of Holdco, they will be transferred to X to satisfy the liquidation entitlement of the Holdco common shares.
No portion of the cash deposits or near-cash investments that become assets of Parent as a result of the wind-up of Holdco, or as a result of the wind-up of Opco, will be required to be, or will be, “ear-marked” or segregated to secure the SERP Obligations that were assumed by Parent from Opco or by Holdco from Opco prior to the commencement of the winding-up of each of Opco and Holdco.
Opco and Holdco will be dissolved.
No portion of the cash or near cash investments distributed by Opco to Holdco, or by Holdco to Parent, will be considered to be subject property of an RCA for the purposes s. 207.6(1), or a “contribution” made to an RCA, in respect of the SERP Obligations that will be assumed by Parent. In its summary, CRA stated:
The existing arrangement is an unfunded SERP of Opco that is not an RCA and none of the proposed transactions involving the transfer of the SERP liability to Parentco would create an RCA.
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|Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(1) - Subject Property of a Retirement Compensation Arrangement||no subject property created when sub with SERP obligations is wound-up||174|
Background (current LC structure)
The company maintains a non-registered supplemental employee retirement plan (the “SERP”), which is a retirement compensation arrangement (“RCA”) in order to provide pension benefits to eligible employees whose benefits under the Company’s registered pension plan are restricted by the Act’s maximum pension limitations. Benefits payable under the SERP upon retirement, death or termination of employment of the member are paid by the Company out of its general revenues. Benefits under the SERP are secured with renewable letters of credit (“LOCs”) issued by, e.g., a chartered bank naming the Trustee of a trust governed by an RCA as the beneficiary of the LOCs. The Company periodically makes arrangements for the renewal or replacement of the LOCs in a face amount equal to the “Net Liabilities,” i.e., the actuarially-determined liabilities of the SERP less the market value of any SERP assets. The Company makes a payment to the Trustee in an amount equal to the issuing bank’s Standby Fee and makes a payment in the same amount to the Receiver General on account of the refundable tax payable under Part XI.3. The Trustee, in turn, pays the Standby Fee to the bank which then delivers the renewal or replacement LOCs to the Trustee.
The Company, in conjunction with the establishment of ae New Trust, the Company will make arrangements with one or more insurance companies (“Sureties”) to deliver surety bonds to the Trustee which have an aggregate penal sum equal to the Net Liabilities and have a term not less than one year. The SERP will be amended to provide for the Net Liabilities of the plan to being secured using surety bonds rather than LOCs.
Every time a surety bond is required to be issued, renewed or replaced, the Company will be required to pay the Surety Fee to the Trustee under the New Trust, and the Company will make a corresponding payment to the Receiver General equal to the Surety Fee on account of the refundable tax payable under Part XI.3. The Trustee will, in turn, pay the Surety Fee to the Surety for such issuance, renewal or replacement of a surety bond.
The Current Trust Agreement will be terminated and the Company will continue paying benefits under the SERP as they fall due out of its general revenues.
The fees for the surety bonds are expected to be lower than those for the LOCs. In addition, “surety bonds will not reduce the Company’s borrowing capacity (in contrast to LOCs).”
The amounts paid to the Trustee by the Company and the amounts remitted to the Receiver General by the Company pursuant to s. 153(1)(p) and Regs. 103(7) and 108(1) will constitute contributions made to the RCA , and will be will be deductible by the Company to the extent permitted by s. 20(1)(r) for the taxation year in which they are made.
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|Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(r)||contributions (including re Pt XI.3 tax) for funding surety bond fees, currently deductible||215|
Regarding the deductibility of foreign tax paid on non-business income in computing income for purposes of the Part XI.3 tax on retirement compensation arrangements, CRA stated:
Subsection 207.7(1) requires an RCA trust to pay, for each taxation year of the trust, a refundable tax under Part XI.3 of the Act equal to the amount calculated under that subsection. For this purpose, the trust must include, inter alia, income from a property (determined without reference to paragraph 82(1)(b).) The computation of this income from property must be made in accordance with the provisions of Part I. For this purpose, the foreign tax deductions in subsections 20(11) and 20(12) may be applicable depending on the circumstances.
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|Tax Topics - Income Tax Act - Section 126 - Subsection 126(1)||no foreign tax credit can be claimed for non-business income tax paid on income of RCA trust||91|
In connection with a supplemental executive retirement plan (the “Plan”), the Employer established a trust and made annual contributions to it so that the independent trustee could pay the annual fees for a letter of credit provided by a bank to pay the promised benefits in the event of the Employer’s bankruptcy. The contributions so made were twice the LC fees in order that the Employer could withhold and remit to CRA 50% of the amount of the contributions made to the trustee as Part XI.3 tax. In accordance with the Plan, the Employer pays post-retirement benefits totaling $300,000 directly to the retired employees during the current taxation year. Do such benefits paid directly by the Employer qualify as distributions under the retirement compensation arrangement (“RCA”) as described in para. (c) of the s. 207.5(1) “refundable tax” definition? CRA responded:
[A]n amount is not paid as a distribution under the RCA unless the amount is paid from property held in connection with the RCA. In the above situation, the amounts of the direct payments made by the Employer to retired employees of post-retirement benefits in accordance with the Plan are not amounts paid as distributions under the RCA and would not be taken into account under paragraph (c) of the definition.
Manjit Singh, Jillian Welch, "Retirement Compensation Arrangements and the Prohibited Investment and Advantage Rules", Taxation of Executive Compensation and Retirement, Special Pension Edition, Volume XVI, No. 4, 2012, p. 1041, at 1042
The definition allows an RCA to have more than one specified beneficiary. Moreover, it appears that the phrase "had a significant interest in the employer" could apply, for example, to treat a plan member who acquires and divests of a significant interest over a brief period (e.g., upon the exercise of stock options immediately followed by a disposition of underlying shares as a specified beneficiary and would continue to do so at all subsequent times.
It appears, based on discussions with Finance, that the definition of a specified beneficiary is intended to have such broad scope; however, it should be noted that the definition of a prohibited investment for an RCA generally includes a debt of a specified beneficiary or a share of, an interest in or a debt of, a person, trust or partnership in which the specified beneficiary has a significant interest, does not deal at arm's length or is affiliated with the specified beneficiary. Thus, notwithstanding the intended breadth of the definition of "specified beneficiary," it does not appear that the legislation has the effect of causing a previously held significant interest by a plan member to result in a prohibited investment in a person, trust or partnership, if such plan member no longer held significant interest in, and was dealing at arm's length and was not affiliated with, such person, trust or partnership.…
Subject Property of a Retirement Compensation Arrangement
Opco, which formerly had an active business, but now is inactive, is obligated to pay supplemental executive pension benefits to former executive employees (the “Pensioners”). With the consent of the Pensioners, the non-resident “Parent” (which actually appears to be an Opco grandparent) assumes these “SERP Obligations” for no consideration. Immediately thereafter, Opco is wound-up into its immediate parent (Holdco), and Holdco uses its mostly cash assets to satisfy the liquidation entitlement of the Holdco shares held by Parent. The ruling letter stipulates that no portion of the assets distributed on the two windings-up are“ear-marked” or segregated to secure the SERP Obligations.
CRA ruled that no portion of the distributed assets will be considered a “contribution” made to a retirement compensation arrangement (or the subject property of an RCA for the purposes s. 207.6(1) respecting the SERP Obligations assumed by Parent. As stated by CRA in its summary:
[N]one of the proposed transactions involving the transfer of the SERP liability to Parentco would create an RCA.
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|Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(1) - Refundable Tax - Paragraph (a)||the distribution to a non-resident parent of assets of a subsidiary that had SERP obligations and the assumption of such obligations did not create an RCA||508|
Subsection 207.5(2) - Election
Refundable tax builds up under a RCA trust where the retirement benefits are secured by way of a letter of credit held by the RCA trust. In order to recover the refundable tax, the employer will allow the existing letter of credit to expire, wind-up the RCA trust and establish a new RCA trust that would acquire a new letter of credit to secure the members' promised benefits. Would this permit a refund of the refundable tax? CRA responded:
[T]he RCA trust would continue to exist… . There would simply be a change of the custodian… . Since this does not result in the termination of the RCA trust itself (or a distribution from the RCA), there would be no entitlement to a refund of refundable tax.
"Where all the property of a RCA has been distributed, the custodian may choose to apply subsection 207.5(2) of the Act. In such a situation, subsection 207.5(2) of the Act deems the refundable tax on hand to be nil and any refund due may be claimed by the custodian.
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|Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(n.3)||cancellation of LC||79|
The proper method to obtain the balance of an RCA's refundable tax is to elect under s. 207.5(2) in the year the final distribution of property is made from the RCA.
An RCA trust transfers of a life insurance policy held by it to the employee who is the sole beneficiary of the RCA trust. Could s. 207.5(2) be applied to claim a refund under s. 207.7(2) where, as a result of this transfer, the RCA trust no longer holds property. Would withholding be required?
After noting that s. 207.5(3) provides that s. 207.5(2) does not apply if any part of a decline in the fair market value ("FMV") of “subject property of the RCA" is reasonably attributable to an advantage in relation to the RCA trust - subject to the exercise of CRA discretion, CRA further noted that “the holding of a life insurance policy with life insurance coverage (death benefit) in a year is a benefit that is conditional on the existence of the RCA” and, thus, was a benefit described in para. (a) of “advantage,” and also could give rise to an “RCA strip,” as the payment for life insurance coverage reduces the FMV of the subject property of the RCA trust each year as the amount paid for this protection is not invested in property held in connection with the RCA trust,” CRA then stated:
In a situation where it is reasonable to attribute a portion of a decline in the FMV of the specified property of the RCA to an advantage relating to it, the custodian of the RCA trust would be unable to make an election under subsection 207.5(2) unless the Minister is satisfied that it is just and equitable in the circumstances to permit that election to be made.
In the situation where an RCA trust is wound up, the Minister may, depending on the circumstances, allow the election by adjusting the amount deemed under subsection 207.5(2) to be the RCA's refundable tax. The deemed amount may, depending on the circumstances, be adjusted to reflect the decline in the FMV caused by a prohibited investment or a benefit that would otherwise not result in a repayment.
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|Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(1) - RCA Strip||holding of life insurance policy could entail RCA strip||228|