Section 207.6

After indicating that a life insurance company can be a custodian of a "retirement compensation arrangement" (“RCA”), CRA went on to state:

Subsection 207.6(2) sets out special provisions where an employer acquires an interest in a life insurance policy for the purpose of enabling the employer to fund benefits to be received by an employee upon or after retirement. In this case, the employer is deemed to be the custodian of a retirement compensation arrangement.

CCRA provided the following overview of the use of a life insurance policy to fund an RCA:

[W]here an employer acquires an interest in a life insurance policy to enable it to fund benefits to be received by a person on or after a taxpayer's retirement … [t]he provisions of Part XI.3 then apply. An amount equal to twice the premiums paid on the policy is deemed to be a contribution made under the arrangement. The employer is entitled to a deduction equal to that deemed contribution. Under the Act, an inter vivos trust is deemed to have been created on the date the retirement compensation arrangement was established. The life insurance policy is deemed to be property of the trust. The trust is subject to a 50% refundable tax on all deemed contributions made and on all income from the life insurance policy. All payments made to the employee or to a person other than the employee under the life insurance policy are then treated as distributions under the retirement compensation arrangement and are included in the income of the person receiving them. The employer is entitled to a refund of the 50% refundable tax when the amounts are paid to the employee. This refund must be included in the employer's income.

Regarding an RCA trust making withdrawals from a life insurance policy that was used to fund a retirement compensation arrangement, where s. 207.6(2) applied, CCRA indicated that since such amounts were deemed to be received by the recipient, the RCA trust was not subject to Part XI.3 tax on the amounts arising from the interest in the policy. However, those amounts may give rise to a refund of the refundable tax based on the calculation provided for in para. (c) of the definition of refundable tax in s. 207.5(1); and the employee will be taxed on the amounts received under ss. 207.6(2)(d) and 56(1)(x).

Part XI.3 applies where a corporation purchases a life annuity in order to provide additional retirement income to an employee. The corporation would be deemed to be the custodian and the annuity (which would be deemed under s. 138(12)(f) to be a "life insurance policy") would constitute the subject property.

Where the employer wishes to withdraw funds from insurance policies which have been acquired by the custodian of an employee benefit plan where the amounts withdrawn will be used to purchase an annuity to provide an employee with retirement income, then pursuant to s. 207.6(2) the employer will be deemed to be the custodian of an RCA, the annuity will be the property of the RCA, and an amount equal to twice the cost of the annuity will be deemed to be a contribution to the RCA.

An employer purchased an exempt life insurance policy on the lives of the employees, one of the employees died and the benefit under the policy was paid to the employer corporation, which was obligated to use a portion of the proceeds to pay a death benefit to the estate of the deceased, and the remainder of the death benefit to pay the future premiums on the remaining life insurance policies. The full amount of the death benefit was taxable to the employer by virtue of ss.207.6(2)(d) and 12(1)(m.3). An amount equal to twice the premiums paid on the remaining life insurance plans would be treated as a contribution to the plan pursuant to s. 207.6(2)(c). The receipt of the death benefit from the policy by the employer would be taken into account in determining the "refundable tax" as defined under s. 207.5(1), and any tax refunded to the employer would also be taxable to it. The benefits paid by the employer to the estate in excess of $10,000 would be taxed as a death benefit.

Significantly different results obtained where a trusteed RCA was established.

Where there is a provision in an employee benefit plan for a change of trustee and the new trustee is resident in Canada, this change in trustee would not by itself result in the application of s. 207.6(4).

General discussion of contributions to a foreign pension plan.

S. 56(1)(a) generally requires the recognition of an amount received as or in satisfaction of a pension benefit. A portion of a multi-employer US defined benefit pension plan (a qualified plan under IRC s. 401(a)) was held for the benefit of Canadian-resident participants. CRA ruled that a transfer of a portion of the assets in this plan to a new plan (also qualifying under IRC s. 401(a)) established for the benefit of a portion of the beneficiaries of the old plan, including some of the Canadian beneficiaries, so that they ceased to be participants in the old plan, did not trigger any income inclusion under s. 56(1)(a).

CRA also accepted a representation that the administration of the old plan for the benefit of the Canadian residents was exempted from the resident’s arrangement rules in ss. 207.6(5) and (5.1) by virtue of satisfying the prescribed contribution conditions in Reg. 6804 relating to foreign plans maintained by foreign non-profit organizations, and that the same would apply regarding the Canadian participants and related assets transferred to the new plan.

CRA ruled that a new supplemental pension plan would qualify as a retirement compensation arrangement and that s. 207.6(7) would apply to the transfer from the old RCA trust to the new one (which would also entail CRA being asked to now hold the existing 50% refundable tax for the account of the new trust). The new trust had similar terms to, but with more flexible payout terms than, the old trust.