Principal Issues: Could a loan from an employer to a Retirement Compensation Arrangement (RCA) be considered a contribution subject to additional refundable tax?
Position: An employer loan to an RCA could constitute a contribution to the RCA subject to Part XI.3 refundable tax.
Reasons: Previous positions taken.
XXXXXXXXXX 2009-030877 Andrea Boyle, CGA February 3, 2010
Dear XXXXXXXXXX :
Re: Loan by Employer to Retirement Compensation Arrangement
This in reply to your facsimile dated February 4, 2009, in which you asked whether a loan from an employer to a Retirement Compensation Arrangement (RCA) would be considered a contribution subject to refundable tax in the given situation:
- an RCA has a refundable tax balance;
- the employer makes a loan to the RCA equal to the amount of the refundable tax;
- the RCA purchases and retains legal ownership of an annuity and annual annuity receipts are paid to a retired former employee; and
- refundable tax received by the RCA on the distributions to the employee is used to repay the employer loan.
The particular situation outlined in your facsimile appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
In previous advance income tax rulings, the Canada Revenue Agency has stated that a loan by an employer to an RCA would not be considered a contribution when the employer loaned an amount equal to the refundable taxes to the RCA in order to facilitate the wind-up of the RCA. The common element in these rulings that differentiate them from the fact situation described above is that the wind-up of the RCA is not imminent.
The determination of whether an amount paid by an employer to an RCA is a contribution is a question of fact. In order to make such a determination, it is necessary to review all the relevant facts and documents surrounding a particular situation which can only be done in the context of an advance income tax ruling. However, from the information provided, the employer loan to the RCA could, in our opinion, constitute a contribution to the RCA subject to Part XI.3 refundable tax.
We trust that these comments will be of assistance.
Yours truly,
Louise J. Roy
Manager
for Acting Director
Ontario Corporate Tax
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch