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.
The Directorate went on to state:
Paragraphs 18(1)(o.2) and 20(1)(r) generally limit the deduction of contributions made in a year by a taxpayer under a retirement compensation arrangement to contributions that relate to services rendered by an employee or former employee of the taxpayer. While we are of the view that amounts paid to the trustee under the Arrangement are not amounts paid under a retirement compensation arrangement, we are of the view that those paragraphs would apply if it were determined that the Arrangement was a retirement compensation arrangement.