Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Are mutual funds properties that can be used in the election under 207.5(2)?
2. Whether a distribution, withholding and reporting as consequence of a letter of credit held by a RCA trust is the responsibility of the trust or the employer?
3. Are there any restrictions on payments of benefits out of or under a RCA?
Position:
1. No.
2. The custodian of the RCA trust.
3. Terms of the RCA
Reasons:
Wording of the Act
April 7, 1999
WINNIPEG TAXATION CENTER HEADQUARTERS
Income Tax Ruling and
Attention: Pearl Fedick Interpretations Directorate
RCA Unit Fouad Daaboul
(613) 957-2087990405
XXXXXXXXXX
This is in reply to your facsimile submission of February 17, 1999, wherein you requested our views in respect of the following questions as addressed to you by XXXXXXXXXX in her letter of January 12, 1999.
Question 1
Step 4 on the T3-RCA indicates that an election to recover refundable tax on hand can only be made if all of the property in the RCA at the end of the tax year consisted only of cash, debt obligations, shares listed on a prescribed stock exchange, or any combination of these. Although Step 4 does not indicate mutual funds as one of these properties, XXXXXXXXXX requested confirmation that such mutual funds are properties which can be used in Step 4.
Our comments
An election under subsection 207.5(2) of the Act may only be made where the subject property of the trust, if any, consists only of cash, debt obligations, shares listed on a prescribed stock exchange, or any combination thereof. In our view, where the subject property of an RCA trust includes units in a mutual fund trust, a unit trust, or a registered investment, the requirements of subsection 207.5(2) of the Act will not be met.
Question 2
Where an RCA trust holds a letter of credit for the benefit of an employee, which of the following is responsible to provide benefit payments to the employee: the employer or the RCA trust, and consequently what are the withholding requirements for such payments?
Our comments
An arrangement whereby the only property of an RCA trust is a letter of credit generally operates such that the employer is obliged to make certain payments to employees, and if such payments fail to be made, the employee seeks to obtain payment pursuant to the letter of credit arrangement. Where the RCA trust calls upon the letter of credit and an amount is paid to the RCA trust, the RCA trust will then distribute benefits to the beneficiary and the RCA trust is required to withhold tax by virtue of paragraph 153(1)(q) of the Act. If payments are made directly from the employer to the beneficiary, the employer is required to withhold tax pursuant to the nature of the payment. In the first scenario, the payer is required to complete a T4A-RCA supplementary to report distribution made out of, under or in conjunction with an RCA as well as the income tax deducted therefrom. In the second scenario, the employer withholds and reports depending upon the nature of the payment. Generally such payments would be superannuation or pension benefits to which paragraph 153(1)(b) is applicable.
Question 3
Are there any restrictions on payments of benefits out of or under a RCA trust?
Our comments
Under the Act, an RCA provides for benefits that are to be received or enjoyed by a beneficiary generally on or after the retirement or the loss of an office or employment of an employee. In our view, once an arrangement meets the definition of an RCA in subsection 248(1), any payment made under the RCA is subject to the terms and conditions of the arrangement, regardless of when the payment is made. This would include payments from an annuity purchased by the RCA trust.
Finally, we cannot provide examples about tax-sheltering following the death of the beneficiary as requested by XXXXXXXXXX as we do not provide tax planning advice. Should she have particular queries on the application of the Income Tax Act we would be pleased to provide our views.
We trust our comments will be of assistance to you. Should you wish to discuss our comments further do not hesitate to call us.
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch