Section 207.7

Where an annuity contract purchased by an employer to provide retirement benefits for an employee is not a prescribed annuity, the payment by the employer of the tax on the deemed interest on the accumulating fund will be considered to be an additional contribution to the RCA which, in turn, would be subject to the refundable tax. The Department agrees to stop the resulting pyramiding of refundable tax after the third calculation.

The employer for an RCA trust contributed to it an amount equaling the fee payable by the trust to a financial institution for issuing a letter of credit, plus the (equal) amount of the refundable tax. As a result of this contribution, the refundable tax of the RCA trust is equal to the cost of issuing the letter of credit. Subsequently, the employer paid the amounts necessary to provide pension benefits to the RCA beneficiaries, with no refundable tax being withheld from those amounts, and with those amounts used by the trustee to pay such benefits.

Can the RCA trust recover the refundable tax in respect of the contribution used to pay the costs of issuing a letter of credit when paying such pension benefits to the beneficiaries? In responding negatively, CRA stated:

Subsection 207.7(1) provides that every custodian of an RCA must pay a tax for each taxation year equal to the amount, if any, by which the refundable tax of the arrangement at the end of the year exceeds the refundable tax at the end of the immediately preceding year. Subsection 207.7(2) allows the Minister to refund to a custodian for a taxation year the amount, if any, by which the refundable tax at the end of the immediately preceding year exceeds the refundable tax at the end of the year. The refundable tax of an RCA at the end of a taxation year of an RCA trust is defined in subsection 207.5(1). It includes, inter alia, one-half of the contributions made to the RCA before the end of the year while it was an RCA minus one-half of all amounts paid out of the arrangement while it was an RCA and before the end of the year that are not amounts distributed as part of a series of contributions and refunds.

In the situation you have described, we are of the view that the mere payment of pension benefits in a year will not result in the application of subsection 207.7(2) since the refundable tax at the end of the year will be increased by 50% of the contribution paid by the employer to enable the trust to pay the pension benefits. In addition, 50% of the amount paid will reduce the refundable tax for that year.