Retirement Compensation Arrangement

Background

The Participant, a retired employee of Employerco, is entitled to defined benefits under both a registered pension plan and an existing retirement compensation arrangement (the Existing Supplemental Plan) funded by the Existing RCA Trust, whose trustee (the Existing RCA Trustee) generally only acts upon instructions from Employerco.

Proposed transactions

Employerco and the Participant will enter into a New Supplemental Plan for the purpose of providing retirement income to the Participant in respect of the Participant’s service as an employee and in substitution for the benefits provided to the Participant under the Existing Supplemental Plan.

Under the terms of the New Supplemental Plan, the amount of the annual benefits payable (quarterly) to the Participant is not materially different from those under the Existing Supplemental Plan, with a lump sum payable to the surviving spouse or other beneficiary on death; however, the Participant may, at any time

(i) following material changes in the Canadian economy or the financial needs of the Participant or Participant’s family, apply in writing to the Custodian to vary the amount of annual benefits, or

(ii) following the occurrence of a Specified Event, apply in writing to the Custodian, to receive a lump sum payment equal to the value of the Participant Account (i.e., the property in the trust including the right to the refundable tax) and the Custodian shall distribute the property then held by the New RCA Trust to the Participant, as well as any refundable tax generated in due course by such distribution.

“Specified Event” means the occurrence of:

(i) a significant health event or other emergency that … creates an unexpected change in financial circumstances and/or financial need, (ii) a material deterioration in the Canadian economy, (iii) a material change in personal income tax rates …, or (iv) any other event that could not have reasonably been foreseen by the Participant and creates an immediate need by the Participant for the use of funds held by the Trustee under the terms of the New RCA Trust.

Employerco will cause the Existing RCA Trustee to transfer a lump sum (equalling ½ of the actuarial equivalent value of the benefits accrued to the date of settlement) directly from the Existing Supplemental Plan to the custodian of the New Supplemental Plan, and apply for a corresponding amount of refundable tax to be now held by CRA for the account of the New rather than Existing RCA Trust.

Rulings

The New Supplemental Plan will qualify as an RCA; and s. 207.6(7) will apply to the transfer to it.

Pension contributions paid by an employer on behalf of Canadian resident of French nationality were constructively received by the employee and were not to an RCA, SDA or EBP. CRA stated:

Since the employer acts as an agent and the amounts paid are not employer contributions, the rules on retirement compensation arrangements and employee benefit plans do not apply.

A plan set up to provide benefits to officers of a corporation was not a retirement compensation arrangement (RCA) since the benefits to be paid were not reasonable in the circumstances.

A closely-held corporation that was dividending out all the profits of its business also established a purported retirement compensation arrangement (RCA) trust for two employees who, indirectly, were the corporation’s two shareholders, and made contributions to the trust that were funded by loans from the trust. In finding that the arrangement did not qualify as an RCA because the benefits were not reasonable, the Directorate noted that the two individuals rendered their services to the corporation on a part-time basis, the contributions were funded with the loans rather than out of earnings, and it was only recently that the corporation had started paying salaries to the individuals.

In a general response to a query as to whether a special reserve fund that an employer creates by depositing money with a broker to provide for the payment of a portion of a pension payable for the retirement of a management employee will constitute a salary deferral arrangement or a retirement compensation arrangement, CRA stated:

In a situation where an employer pays money to a bank, trust company or broker to meet its obligations upon the retirement of an employee, the money could be considered a contribution in respect of benefits that may be received by a person upon that person's retirement. …

Please note that the definition of a retirement compensation arrangement does not require that the contributions become the property of the person to whom they are made or that a trust be created. All that is required is the payment by an employer to another person of contributions in respect of benefits that a person may receive on retirement.

Can a life insurance company carrying on business in Canada be a custodian as defined in the definition of "retirement compensation arrangement" (“RCA”)? CRA responded:

[A]n employer of a taxpayer makes contributions to a life insurance company that fall within the definition of RCA, the life insurance company is a custodian as [so] defined … .

… [H]owever … a payment made to acquire an interest in a life insurance policy is not a contribution within the definition of RCA. Consequently, the life insurance company that receives such a payment is not a custodian, within the meaning of the RCA definition, merely by virtue of having received the payment.

An RCA trust created for the benefit of a managing shareholder and to which the employer contributed $100,000 lends the amount of the contribution, net of refundable taxes (i.e., $50,000), to the corporation. The loan bears interest of 12%. CCRA stated:

[W]here contributions under a plan are returned to the employer in the form of a loan, the Agency may question the existence of a retirement compensation arrangement in a situation where the contributions made may not relate to benefits that are receivable by a taxpayer upon retirement but rather for other purposes.

Discussion of the distinction in the positions taken on letters of credit in question 21 of the 1995 APFF Round Table and question 48 of the 1992 Canadian Tax Foundation Round Table.

A registered pension which is revoked or deregistered will be considered to be a retirement compensation arrangement from the date of revocation or deregistration. However, the tax under Part XI.3 is not exigible on accumulated contributions and investment income accruing before the date registration is revoked.

The exclusion in paragraph (m) does not apply where an employer agrees to provide periodic pension payments on retirement or a lump-sum payment on termination of employment and the employer purchases insurance to ensure that the payments will be made should the employer be unable to meet its obligations under such arrangement because of bankruptcy or other legal reasons specified in the insurance policy.

If a fund was excluded from the salary deferral arrangement definition by virtue of the exclusion in paragraph (k) thereof for a three-year bonus arrangement and it could be shown that the purpose of the arrangement was not to fund retirement benefits, the fund also would be exempted from the retirement compensation arrangement rules even though the three-year deferral period might end in a year after retirement.

An amalgamation of an employer should not effect the beneficiary of a retirement compensation arrangement.

An arrangement under which an employee elects to receive a retiring allowance over a three-year period and advises the employer to place the amount in the interim in a joint escrow account, constitutes a retirement compensation arrangement.

If the custodian to whom money is paid is an agent of the employer and the contributed funds do not become its property, no Part XII.3 tax is payable. If the custodian receives contributions as an agent of the employee or at the employee's direction, the arrangement will not be a retirement compensation arrangement provided that the establishment of the trust is not part of an encompassing arrangement.

A trust established by a corporation in order to fund any personal liability of directors under various provincial statutes would not constitute a retirement compensation arrangement.

The setting up of a fund to finance payment of retiring allowances to elected municipal officers who seek to hold office will probably constitute a retirement compensation arrangement.

Any security arrangement can be considered a contribution, including the pledging of property as security for the plan, letters of credit, mortgages or asset-backed bank guarantees. An employer who sets apart assets for the benefit of employees in such a way that the assets are not available to creditors also may be considered to have made a contribution.

Discussion of employee thrift plan.