Background (current LC structure)
The company maintains a non-registered supplemental employee retirement plan (the “SERP”), which is a retirement compensation arrangement (“RCA”) in order to provide pension benefits to eligible employees whose benefits under the Company’s registered pension plan are restricted by the Act’s maximum pension limitations. Benefits payable under the SERP upon retirement, death or termination of employment of the member are paid by the Company out of its general revenues. Benefits under the SERP are secured with renewable letters of credit (“LOCs”) issued by, e.g., a chartered bank naming the Trustee of a trust governed by an RCA as the beneficiary of the LOCs. The Company periodically makes arrangements for the renewal or replacement of the LOCs in a face amount equal to the “Net Liabilities,” i.e., the actuarially-determined liabilities of the SERP less the market value of any SERP assets. The Company makes a payment to the Trustee in an amount equal to the issuing bank’s Standby Fee and makes a payment in the same amount to the Receiver General on account of the refundable tax payable under Part XI.3. The Trustee, in turn, pays the Standby Fee to the bank which then delivers the renewal or replacement LOCs to the Trustee.
Proposed transactions
The Company, in conjunction with the establishment of ae New Trust, the Company will make arrangements with one or more insurance companies (“Sureties”) to deliver surety bonds to the Trustee which have an aggregate penal sum equal to the Net Liabilities and have a term not less than one year. The SERP will be amended to provide for the Net Liabilities of the plan to being secured using surety bonds rather than LOCs.
Every time a surety bond is required to be issued, renewed or replaced, the Company will be required to pay the Surety Fee to the Trustee under the New Trust, and the Company will make a corresponding payment to the Receiver General equal to the Surety Fee on account of the refundable tax payable under Part XI.3. The Trustee will, in turn, pay the Surety Fee to the Surety for such issuance, renewal or replacement of a surety bond.
The Current Trust Agreement will be terminated and the Company will continue paying benefits under the SERP as they fall due out of its general revenues.
Purposes
The fees for the surety bonds are expected to be lower than those for the LOCs. In addition, “surety bonds will not reduce the Company’s borrowing capacity (in contrast to LOCs).”
Rulings
The amounts paid to the Trustee by the Company and the amounts remitted to the Receiver General by the Company pursuant to s. 153(1)(p) and Regs. 103(7) and 108(1) will constitute contributions made to the RCA , and will be will be deductible by the Company to the extent permitted by s. 20(1)(r) for the taxation year in which they are made.