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:
In addition, if it is determined that a portion of the contributions made under the Arrangement constitute a contribution to a retirement compensation arrangement rather than an appropriation of funds notwithstanding our view to the contrary, it is our view that such portion of the contributions made may not be deductible from the corporation's income pursuant to section 67.
After quoting from Petro-Canada, the Directorate stated:
In considering this jurisprudence, we are of the view that in order to establish the reasonableness of the expense, one must establish what a reasonable business person would have undertaken to pay as a contribution to a retirement compensation arrangement with only the business considerations of the Corporation in mind. In addition, when assessing the reasonableness of an expense, an objective element must be sought.