Principal Issues: Is a deduction for a contribution to an RCA permitted by an employer pursuant to paragraph 20(1)(r) of the Act where the majority of the service provided by the employee was rendered to subsidiaries of the employer and not to the employer itself?
Position: No
Reasons: With respect to the deductibility by the taxpayer of employer contributions to an RCA, it is the CRA's view that the contributions must be made to the RCA in respect of a person, that person must be an employee or former employee of the taxpayer, and the contributions must be in respect of services rendered to the taxpayer.
January 10, 2008
Aggressive Tax Planning Division HEADQUARTERS Compliance Programs Branch Income Tax Rulings Directorate Attention: Elayne Adler Kimberly Duval (613) 957-2115
2007-025985
Deductibility of an Employer Contribution to a Retirement Compensation Arrangement
This is in response to your e-mail correspondence to us of October 18, 2007 requesting our views on the deductibility of employers' contributions to a Retirement Compensation Arrangement (an "RCA") pursuant to paragraph 20(1)(r) of the Income Tax Act (the "Act"). Of particular concern to you is a situation where, within a related corporate structure, the particular employer making the RCA contribution (Parentco) is not the same entity to which the employment services of the employee were performed. That is to say, the majority of the employment services performed by the executive in question, were in fact, provided to various subsidiaries of the employer (Subco).
Our Comments:
An RCA is defined in subsection 248(1) of the Act as generally being an arrangement under which payments are made by an employer of a taxpayer to a custodian in connection with benefits that are to be received by a 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, subject to certain listed exclusions. An employer may only deduct amounts paid in the year as contributions to an RCA where the amounts are reasonable and to the extent that the conditions in paragraph 20(1)(r) of the Act are met.
Paragraph 20(1)(r) of the Act provides that the contribution must be made in respect of services rendered by an employee or former employee of the taxpayer. It is our view that to be eligible to deduct a contribution made by a taxpayer in respect of such a person under paragraph 20(1)(r) of the Act, that person must be an employee or former employee of the taxpayer and the contribution must be in respect of services by the employee or former employee rendered to the taxpayer.
Therefore, for purposes of your current file, we would take the view that Parentco could only deduct contributions to the RCA pursuant to paragraph 20(1)(r) of the Act to the extent the amounts are reasonable and the employee in question rendered employment services to Parentco itself. Contributions made by Parentco for years of service performed by the employee to Subco would not be considered to meet the requirements under paragraph 20(1)(r) of the Act and would therefore, not be considered a deductible amount to Parentco.
We trust that these comments will be of assistance.
For your information 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, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Mary Pat Baldwin, C.A
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch