Principal Issues: [TaxInterpretations translation] Is an arrangement that has been presented to the Agency as a retirement compensation arrangement actually a retirement compensation arrangement or is it a salary deferral arrangement?
Position: This is a salary deferral arrangement.
Reasons: The arrangement allows a participant to defer pay and is a salary deferral arrangement as defined in subsection 248(1). It is deferred compensation. In addition, the employer has not made contributions to the arrangement from its own assets.
October 17, 2008
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XXXXXXXXXX Tax Services Office Attention: XXXXXXXXXX |
Headquarters 2007-025420 |
Request for Opinion - XXXXXXXXXX
Retirement compensation arrangement and salary deferral arrangement
This is further to your fax request for an opinion dated September 27, 2007, regarding an arrangement that has been submitted to the Agency as a retirement compensation arrangement.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
The Facts
Our understanding of the facts is as follows, taking into account the representations made by XXXXXXXXXX to you in letters dated December 14, 2006 and February 20, 2008 and the documents accompanying them.
1. XXXXXXXXXX (the "Employer") has established an arrangement (the "Arrangement") to provide benefits to its employees (the "Participants"). The Arrangement has been submitted to the Agency as a retirement compensation arrangement, as that term is defined in subsection 248(1).
2. The Participants in the Arrangement have completed XXXXXXXXXX which reads as follows:
XXXXXXXXXX
3. Based on the facts provided to us, the Employer, the former Employer or a person with whom the Employer or former Employer does not deal at arm's length has never made a payment to the Arrangement out of its own funds. The amounts paid to the Arrangement come from the amounts that the Participants XXXXXXXXXX. These amounts are generally salary or wages derived from an office or employment.
4. For the XXXXXXXXXX years and prior, Participants' T4 slips were completed as follows: the gross amount of wages was entered in Box 14 "Employment income" XXXXXXXXXX.
For the XXXXXXXXXX taxation year, the slips issued to employees were filed as follows: the gross amount of the salary was entered in Box 14 "Employment income" XXXXXXXXXX.
5. XXXXXXXXXX
6. XXXXXXXXXX
Our Opinion
7. We have determined that the Arrangement is not a retirement compensation arrangement for income tax purposes but rather a salary deferral arrangement. After reaching a conclusion on the nature of the Arrangement for tax purposes, we reviewed the tax rules relating to salary deferral arrangements.
Nature of the plan
8. First of all, we must ask ourselves what is the scope XXXXXXXXXX. The Participant will therefore benefit from the sums in a later year.
The Participant qualifies XXXXXXXXXX. We are of the view that these are amounts owed by the Employer to the Participant in consideration for the Participant's work. The Employer had a legal obligation to pay its employees and the amounts were owed to the Participant. The Employer could not dispose of these amounts as it saw fit. Although the Participant characterizes the XXXXXXXXXX, we are of the view that this characterization does not reflect the legal reality. We are of the view that the Participant XXXXXXXXXX in order that a portion of the Employee’s remuneration paid to it can in turn be paid on the Employee’s account to the Custodian. However, the fact remains that these amounts belong to him or her. We are of the view that this is not XXXXXXXXXX.
9. The Employer has presented the plan to the Agency as a retirement compensation arrangement. Subsection 248(1) defines a retirement compensation arrangement in part as follows:
…[A] plan or arrangement under which contributions … are made by an employer or former employer of a taxpayer … to another person … referred to as the “custodian”… 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… .
The definition specifies that certain plans or arrangements are not retirement compensation arrangements, including salary deferral arrangements. Thus, if a plan or arrangement is a salary deferral arrangement, it will not qualify as a retirement compensation arrangement even if it otherwise satisfies all the other conditions set out in the definition of retirement compensation arrangement. It is therefore necessary to determine, inter alia, whether the Arrangement under review is a salary deferral arrangement before concluding as to the presence of a retirement compensation arrangement.
10. Section 248(1) defines a salary deferral arrangement in part as follows:
…[I]n respect of a taxpayer, means a plan or arrangement, whether funded or not, 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 this Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year (including such a right that is subject to one or more conditions unless there is a substantial risk that any one of those conditions will not be satisfied)… .
The definition specifies that certain plans or arrangements are exceptions to the definition of a salary deferral arrangement. We are of the view that none of these exceptions apply to the situation under review.
11. Let us now apply each of the elements of the definition of a salary deferral arrangement to the Arrangement.
Does the Arrangement entitle a person, in this case the Participant, to receive an amount after the year? In our view, yes. XXXXXXXXXX and the Arrangement result in the Participant being entitled to receive an amount after the year.
The Act provides in subsection 248(1) that a deferred amount under a salary deferral arrangement is an amount that a taxpayer is entitled to receive after the end of a taxation year. In addition, the right to receive an amount includes a right subject to one or more conditions, unless there is a substantial risk that one of those conditions will not be satisfied. We are of the view that the amount of the Participant's salary contributed to the Arrangement is a deferred amount (the "Deferred Amount").
12. Is it reasonable to consider that one of the main purposes for the existence or creation of this right is to postpone the tax payable under the Act? In our view, the Participant has requested from the Employer that a portion of the Participant’s salary not be paid to the Participant in order to defer the tax payable under the Act. The fact that the Custodian would be required to pay a tax under section 207.1 if the Arrangement were a retirement compensation arrangement is not a determinative factor in determining whether the existence or creation of the Arrangement has, among its main purposes, the deferral of tax payable under this Act by the Participant, since the Participant and the Custodian are two separate taxpayers.
13. Does the tax deferral relate to an amount owing to the Participant as salary or wages for services rendered in the year or a previous taxation year? We have already determined that Employee XXXXXXXXXX in order that a portion of the Employee’s remuneration paid to it can in turn be paid on the Employee’s account to the Custodian. It is our opinion that the Deferred Amount is an amount that was due to the Participant as salary or wages for services rendered by the Participant in a year or a preceding year.
14. In conclusion, it is our opinion that the Arrangement satisfies all the conditions of the definition of a salary deferral arrangement and is not a retirement compensation arrangement. The tax treatment will therefore be that of a salary deferral arrangement.
Tax treatment
15. XXXXXXXXXX
16. Subsection 6(11) provides for the taxation of amounts deferred under a salary deferral arrangement. This subsection reads as follows:
Where at the end of a taxation year any person has a right under a salary deferral arrangement in respect of a taxpayer to receive a deferred amount, an amount equal to the deferred amount shall be deemed, for the purposes only of paragraph 6(1)(a), to have been received by the taxpayer as a benefit in the year, to the extent that the amount was not otherwise included in computing the taxpayer’s income for the year or any preceding taxation year.
If at the end of a particular taxation year (e.g., 2008) a deferred amount has not been taxed in 2008 or a previous taxation year, we are of the view that the deferred amount is deemed to be received in that year under subsection 6(11). In this case, we are of the view that this subsection can be applied to any taxation year that is not statute-barred subject to the application of subsection 152(4).
We consider the Deferred Amount to be an amount that has not been included in computing the Participant's income. XXXXXXXXXX the Participant has not included in computing his or her income the deferred amount under the Arrangement.
XXXXXXXXXX of the T4 slip prepared by the Employer. According to the Employers' Guide - Filing the T4 Slip and Summary, an employer must include in this Box the employee's contributions to a registered pension plan and certain amounts related to a retirement compensation arrangement. The text under the heading "Box 20 - RPP contribution" reads in part as follows:
Enter the total amount the employee contributed to a registered pension plan (RPP). If the employee did not contribute to a plan, leave this box blank.
Enter any deductible retirement compensation arrangement (RCA) contributions you withheld from the employee’s income. Do not include amounts that are not deductible. If the amount in box 20 includes RPP contributions and deductible RCA contributions, attach a letter informing the employee of the amounts. [our emphasis]
XXXXXXXXXXXXXX. According to the Guide, it is up to the employer to determine whether a contribution to a retirement compensation arrangement is deductible for the purpose of preparing the T4 slip. XXXXXXXXXX
XXXXXXXXXX
17. Interest and other income relating to the Arrangement will be taxed by virtue of subsection 6(12). That subsection reads as follows:
Where at the end of a taxation year any person has a right under a salary deferral arrangement (other than a trust governed by a salary deferral arrangement) in respect of a taxpayer to receive a deferred amount, an amount equal to any interest or other additional amount that accrued to, or for the benefit of, that person to the end of the year in respect of the deferred amount shall be deemed at the end of the year, for the purposes only of subsection 6(11), to be a deferred amount that the person has a right to receive under the arrangement.
18. Subsection 6(12) does not apply if the agreement is governed by a trust. We are of the view that the Arrangement is not governed by a trust. Based on the facts provided to us, the settlor, in this case the Employer, has not transferred any amount from its patrimony. In our opinion, the conditions of Article 1260 of the Civil Code of Québec would not be satisfied. Indeed, according to this Article, in order to conclude that a trust exists, there must be a transfer of property from the settlor's patrimony to the trustee. This section reads as follows:
A trust results from an act whereby a person, the settlor, transfers property from his patrimony to another patrimony constituted by him which he appropriates to a particular purpose and which a trustee undertakes, by his acceptance, to hold and administer.
Since there is no trust, subsection 6(12) must be applied.
19. Depending on the circumstances, paragraph 6(1)(i) could also apply in respect of amounts that a Participant receives in a year under a salary deferral arrangement. Essentially, this paragraph taxes amounts received that have not been previously taxed under paragraph 6(1)(a) and subsections 6(11) and 6(12).
20. XXXXXXXXXX Such annuities are also subject to the application of paragraph 6(1)(i) subject to the application of paragraph 6(1)(a) and subsections 6(11) and 6(12).
21. XXXXXXXXXX
Access to Information
22. For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 Canada Revenue Agency RC4120(F) Rev 08.