| 24(1) | 903178 |
| Maureen Shea-DesRosierss | |
| (613) 957-8953 |
19(1)
December 5, 1990
Dear Sirs:
Re: Employee Benefit Plans existing prior to December 31, 1987
This is in reply to your letter of November 6, 1990 concerning the rules for Employee Benefit Plans ("EBP") after the October 8, 1986 amendments to the Income Tax Act and its grandfathering provisions.
We do not give opinions in respect of factual completed transactions and therefore suggest you consult your local district taxation office to ascertain the income tax implications. We will however, offer the, following general comments.
A plan that existed on October 8, 1986 will be treated as two separate plans at such time as the transitional rules make the Retirement Compensation Arrangement ("RCA") definition applicable to it. The two plans will consist of a statutory plan that comes into existence at that time and is treated as an RCA and the original plan or existing plan, which is not an RCA.
Where the existing plan is not an RCA, its property and earnings will not be subject to the new rules including the 50% refundable tax. On the other hand, the statutory plan will be deemed to receive all property contributed after the date on which it was created. That property and any property reasonably considered to be derived from it will be subject to the RCA rules. As a result, a grandfathered RCA will consist of one trust subject to the old rules and another trust subject to the new rules.
If no contributions were made to the trust after January 1, 1988, distributions from the EBP will be taxable in accordance with the provisions of the Act relating to EBPs. If, however, there are two plans, pursuant to subsection 56(10) of the Income Tax Act (the "Act"), payments out of such a "hybrid" plan would be deemed to have first been paid out of the RCA unless a provision in the plan provides otherwise.
Earnings accrued after 1987 on amounts subject to the EBP rules would generally continue to be governed by those rules. Taxation of the existing arrangement will therefore be governed by the rules for EBPs and as such it will be taxed as an inter vivos trust using the provisions set out in section 122 of the Act.
Where a plan provides that income earned in the EBP be paid to the employer subject to its repayment to the EBP, such a payment will not be recognized as a deduction from the EBP trust's income for tax purposes and will therefore be taxed in the hands of the trust. Notwithstanding that the payments from the EBP trust to the employer are not deductible from the income of the EBP trust, the re-contributions by the employer to the plan, if made after December 31, 1987, will be considered to be contributions to a "statutory arrangement", (i.e. an RCA), and therefore subject to the withholding provisions of paragraph 153(1)(p) of the Act. In addition, although any further payments to the employer from the Plan will be deemed to be paid first out of the RCA pursuant to paragraph 56(10) of the Act (and therefore included in the employer's income pursuant to paragraph 12(1)(n.3) of the Act to the extent that they are from the RCA), the amounts, as part of a series of payments and refunds of contributions under the RCA, will not apply to reduce the amount of refundable tax otherwise payable by the RCA pursuant to paragraph 207.5(1)(c) of the Act.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate