Principal Issues: Will the earmarking of specific assets to meet an employer's obligations under a supplemental retirement arrangement result in the creation of an RCA?
Position: No.
Reasons: It is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under an RPP.
XXXXXXXXXX 2002-017977
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person;
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transaction and the purpose of the proposed transaction is as follows:
FACTS
1. XXXXXXXXXX.
2. XXXXXXXXXX.
3. The Employer is the sponsor and administrator of the XXXXXXXXXX (the "Plan"). The Plan is a registered pension plan as defined at subsection 248(1) of the Act and is also registered under the Pension Benefits Act of XXXXXXXXXX (the "PBA"). The registration number under both statutes is XXXXXXXXXX.
4. The Plan is a defined benefit pension plan. Under the Plan, members ("Members") contribute a percentage of their pensionable earnings. The Employer contributes such amounts, if any, as are required to fund Plan benefits based on actuarial advice, which takes into account the financial position of the Plan. All contributions are subject to the provisions of the PBA and the Act.
5. The Employer provides supplemental pension benefits ("Supplemental Benefits") to qualifying pensioners ("Participants"). Supplemental Benefits were previously provided by the Predecessor and the obligation to provide such benefits was assumed by the Employer as one of the successor businesses to the Predecessor.
The Supplemental Benefits are determined by calculating the difference between the pension benefits that would be paid from the Plan if the Act did not limit the benefits that can be paid from a pension plan that is registered thereunder and the benefits that are payable from the Plan when such limitations under the Act are applied.
The Supplemental Benefits are not pre-funded and are paid on a "pay as you go" basis by the Employer from its general assets.
6. XXXXXXXXXX.
PROPOSED TRANSACTION
7. The Employer proposes to establish a reserve (the "Reserve") in its books to recognize some or all of its present and future liabilities for the Supplemental Benefits. The Reserve would be maintained in accordance with the following rules:
(a) The Employer will annually identify and allocate to the Reserve, or release from the Reserve, sums of money or other Employer assets (the "Reserve Assets") as determined in its discretion based on actuarial advice concerning the Supplemental Benefits liabilities. Such Reserve Assets will be held in a separate account in the name of the Employer with a financial institution for ease of accounting, investment and administration. The separate account will be a corporate investment account and will not be a trust or custodial account. The employer will invest the Reserve Assets in its own name in pooled funds that the Employer selects from time to time. However, these Reserve Assets will continue to form part of the general assets of the Employer and Members and Participants will not have any direct claims against the Reserve Assets. The Reserve Assets will not be held in trust for the benefit of the Members and Participants and no other assets of the Employer have or will be set aside in respect of its Supplemental Benefits obligation to the Members and Participants. The Reserve Assets will be available for the general creditors of the Employer.
(b) Although the Reserve Assets are intended to be available for use by the Employer to meet the Supplemental Benefit liabilities, the directors of the Employer will retain the right by unanimous resolution to eliminate the Reserve and use the Reserve Assets for any other purpose of the Employer.
PURPOSE OF THE PROPOSED TRANSACTION
8. The purpose of the Employer establishing the Reserve arrangements is to be responsible in accounting and making provision within its general assets for its Supplemental Benefit liabilities and to provide some comfort to Participants that the Employer has made provision within its general assets for some or all of such liabilities.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the terms of the Plan are as described above, we rule as follows:
A. The establishment of the Reserve and the identification and allocation of specific sums of money or other Employer Assets as Reserve Assets will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.
The above advance income tax ruling, which is based on the Act and Regulations in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CCRA provided that the proposed Plan is implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch