1083-27-911275
Re: Retirement Compensation Arrangements
We are writing in reply to your memorandum of May 1, 1991, concerning the use of letters of credit to fund retirement compensation arrangements. You reproduced the following question submitted by the 24(1) 24(1) and asked for our advice.
Q. 14. Employers are increasingly looking to various types of compensation arrangements. One proposal involves setting up an unfunded supplemental plan. As a means of providing security for the employer's undertaking of such a plan, a letter of credit is issued by a financial institution. It is our understanding that Revenue Canada may treat letters of credit as a contribution to a retirement compensation arrangement. Is this the Department's position and, if so, what is the basis for such a position?
If we were asked to respond to this question, our answer would be as follows:
Department's Position
Where a letter of credit is issued to a custodian in these circumstances, it is the Department's position that the fair market value of the letter of credit is a contribution to a retirement compensation arrangement. The amount of the contribution is equal to the fair market of the letter of credit which is a question of fact; however, such factors as the date the letter of credit becomes payable, the credit worthiness of the employer, the restrictions on payment, the intent of the parties to the transaction etc. would have to be considered.
We hope the foregoing discussion will assist you in responding to the query.
for ChiefFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch