Principal Issues: 1) Does the fact that the actuary of a retirement compensation arrangement (RCA) uses the same years of service of an employee to calculate the employer's contribution as the actuary of an Individual Pension Plan (IPP), make the employer's contribution to the IPP and the RCA unreasonable and not deductible from the income of the employer?
2) Would the answer to question 1) be the same if the employee is also a shareholder of the employer or a person who does not deal at arm's length with the shareholder?
Position: 1) The use of the same years of service of an employee for the calculation of the contribution to an RCA does not, in and of itself, make the employer's contribution to the IPP unreasonable. As for the RCA, the first question would be whether the plan is a valid RCA rather than a salary deferral arrangement. General comments provided. 2) Yes.
Reasons: 1) Application of the definition and various dispositions regarding IPP and RCA as well as previous positions. 2) Same reasons as in reasons 1.
XXXXXXXXXX 2016-062731 Lucie Allaire, LL.B CPA, CGA, D. Fisc. March 14, 2017
Dear Sir,
Subject: Use of an Individual Pension Plan ("IPP") and a Retirement Compensation Arrangement ("RCA")
This letter is in response to your e-mail of January 18, 2016 in which you requested our views respecting the reasonableness of the contributions that a corporation made both to an IPP and a RCA for the benefit of an employee.
In this regard, you indicated that two separate actuaries had established the amount of the corporation's contributions to the RCA and the IPP based on the same past and current service years of the employee. Not knowing of the existence of the IPP, the RCA actuary did not take into account the amount of contributions made by the corporation to the IPP for the employee's benefit in order to establish the RCA contributions.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act (the “Act”).
Your questions
1. In the situation described, you asked whether the corporation's contribution to the RCA and the IPP are unreasonable and non-deductible.
2. Would the answer to the previous question be the same if the employee who is the beneficiary of both plans is a shareholder of the corporation or a person related to a shareholder?
Our Comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 20(1)(q) allows, among other things, a taxpayer as an employer to deduct such amount in respect of employer contributions to registered pension plans as is permitted under subsection 147.2(1). Under subsection 8300(1) of the Income Tax Regulations, an IPP is a registered pension plan that contains a defined benefit provision.
In the situation where the contributions to an IPP meet all the conditions for being deductible under paragraph 20(1)(q), the fact that the employer also pays money to a non-registered plan without taking into account the contributions paid by the employer to the IPP for the same employee should not, in and of itself, result in the IPP contributions being unreasonable.
Pursuant to paragraph 18(1)(o.2), a taxpayer may not deduct RCA contributions except as expressly permitted by paragraph 20(1)(r). Paragraph 20(1)(r) permits the deduction of amounts paid by the taxpayer in the year as contributions under a RCA in respect of services rendered by an employee or former employee of the taxpayer. However, this paragraph provides that where it is established, by subsequent events or otherwise, that the amounts were paid as part of a series of payments and refunds of contributions under the RCA, such contributions will not be deductible. In addition, section 67 must be complied with.
In the situation described above, you must first determine whether the plan in question is a RCA within the meaning of subsection 248(1). Generally, a RCA means a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer. This definition provides that certain plans or arrangements do not constitute RCAs, such as salary deferral arrangements ("SDAs"). Thus, a plan or arrangement that constitutes a SDA cannot be considered an RCA even if it otherwise meets all the other conditions set out in the RCA definition.
In short, subsection 248(1) defines a SDA as a plan or arrangement under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year.
We have already indicated that plans where the funds are used to finance benefits that can be received by employees under pension plans or supplemental unregistered pension plans are generally RCAs where the plans are pension plans and the benefits are reasonable. Where a plan provides for benefits that are not reasonable, we are of the view that it is a SDA under subsection 248(1). The benefits will not be reasonable when, for example, they exceed those that an employee could expect to receive based on his or her position, salary, and services rendered or where they do not take into account benefits that have otherwise been granted under one or more registered plans.
Where an employee participates in an IPP under which he or she may receive benefits, another plan for the benefit of the employee must have the characteristics of an additional pension plan to be a RCA. In addition, the amounts that may be paid under this plan must be reasonable retirement or pension benefits. If a plan provides benefits that are not reasonable retirement or pension benefits, we are of the view that an SDA exists.
In general, supplementary pension benefits are considered to be reasonable when the terms of the supplemental pension plan are substantially the same as those of the IPP. In addition, benefits that may be paid under the plan must provide the employee with a supplement for the benefits that would be provided under the IPP but for the defined benefit limit.
In situations where a plan provides benefits that are not the same as those provided under the IPP, or provide benefits greater than as a supplement for the benefits that would be provided under the IPP but for the defined benefit limit, a complete analysis of the facts will have to be made in order to establish whether the plan is considered to be an SDA. This determination is a question of fact which includes, among other things, a review of the arrangement and a determination of the objectives and particular circumstances surrounding the creation of the arrangement.
Where it is established that a plan is a RCA, a taxpayer who is an employer may deduct amounts paid in the year as RCA contributions only if the amounts are reasonable under section 67 and the conditions under paragraph 20(1)(r) are met. Whether an amount of RCA contribution is reasonable under section 67 and whether a taxpayer can deduct that amount in computing his or her income under paragraph 20(1)(r) is a question of fact that can be determined only after considering all the relevant facts and circumstances surrounding a particular arrangement.
Finally, in the situation where a plan was created for the benefit of an employee who is a shareholder or a related party, the CRA would apply the same criteria as those set out above. In particular, the benefits will not be reasonable where, for example, they exceed those that an employee would expect to receive based on his or her position, salary and services rendered or profits that have been granted otherwise under one or more registered plans.
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Manager
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch