| 19(1) | File No. 5-8979 |
| D.S. Delorey | |
| (613) 957-3495 |
November 27, 1989
Dear Sirs:
Re: Supplementary Retirement Plan
This is in reply to your letter of October 25, 1989.
With respect to a supplemental retirement allowance pool to be reserved from an employer's annual operating profits, you cite certain facts and/or proposals and request our opinion on the following points:
A. Is the plan a "salary deferral arrangement" as defined in subsection 248(1) of the Income Tax Act (the "Act").
B. Is the liability under a supplemental retirement plan a prescribed debt obligation for the purposes of section 7000 of the Income Tax Regulations (the "Regulations") and subsection 12(9) of the Act. If so, would interest to be credited each year to the pool be taxed annually in the eligible employees' hands.
C. If the plan is not a salary deferral arrangement, would the payment made upon retirement be a "retiring allowance" as defined in subsection 248(1) of the Act.
We are unable to adequately reply to your query without first reviewing all relevant documentation. Where the arrangements are proposed, which appears to be the case based on the content of your letter, such a review would be made by this office where the arrangements are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70- 6R. Where the arrangements are in place, such a review would be made by the relevant district taxation office. We nevertheless offer the following general comments.
A salary deferral arrangement is, generally speaking, an arrangement whereby the receipt of salary or wages earned in one year is deferred until a subsequent year. An arrangement whereby an employer sets aside each year a portion of its after-tax profits in order to have sufficient funds to pay supplemental amounts to its employees upon retirement would normally not represent a salary deferral arrangement. Nor, if no funding is involved, would such an arrangement be a retirement compensation arrangement. In this latter regard, it is not clear from your letter whether or not funding would be involved. If funds are set aside in a separate bank account to pay retiring allowances, this might constitute funding if the bank (or possibly the employer) acts in a fiduciary capacity with respect to those funds.
At the 1984 Canadian Tax Foundation conference, it was stated that, generally speaking, a debt obligation is considered to arise whenever a binding liability is created and the principal amount of the liability can be quantified. It is question of fact as to whether or not a binding liability exists at a particular point in time. In our view, the fact that an employee may not receive an amount allotted to him under supplemental retirement plan if his employment is terminated, or if he retires before reaching age 65, is not sufficient in and of itself to render the liability non-binding.
The provisions of subsection 12(9) of the Act will apply where the debt obligation is a prescribed debt obligation of a type described in any of paragraphs 7000(1)(a) to (d) of the Regulations. However, it may be that subsection 12(4) of the Act will apply directly; i.e., without looking to the deeming provisions of subsection 12(9). Where, under an arrangement, a participant/employee holds an interest in debt obligation is deferred the amount thereof is increased by a stated interest rate (e.g. long-term bond rates), it is our view that given the meaning of "investment contract' in paragraph 12(11)(a) of the Act, subsection 12(4) of the Act will apply to that increase except where the arrangement is a salary deferral arrangement.
Interpretation Bulletin IT-337R2 sets out the Department's views on whether or not an amount received by an employee is a retiring allowance.
The above comments reflect expressions of opinion which, as indicated in Information Circular 70-6R, are not binding on the Department. We trust, however, that they will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate