1992 Canadian Tax Foundation Conference
Retirement Compensation Arrangements
Question 48
Would Revenue Canada please confirm that the following statements of income tax consequences reflects the current views of the Department with respect to the use of bank letters of credit in retirement compensation arrangements ("RCA"):
(a) Where the employer establishes a trust and contributes cash (net of the 50% refundable tax) to the trustee in an amount equal to the fee charged by the bank for issuing a letter of credit to the trust, the amount of the contribution for the purposes of the RCA rules will be restricted to the employer's cash contribution (i.e., including the amount remitted to the Receiver General).
(b) Where the letter of credit is held by the trustee and not by the employee, the employee will not be subject to tax under Part 1 of the Income Tax Act in respect of the letter of credit so long as no distribution is made out of the trust to the employee. This is the case, notwithstanding that the employee may be the named beneficiary under the letter of credit.
(c) Security offered by the employer to the bank in the form of a charge against the employer's line of credit with the bank will not be regarded as a separate contribution to the RCA and, therefore, will not be subject to a refundable tax.
Answer 48
If you seek confirmation that the amount of the contribution will be the total of the cash payment to the trustee plus the 50% refundable tax remitted to Revenue Canada, rather than the face amount of the letter of credit, we confirm that such total will represent the amount of the contribution.
We confirm that the comments in (b) above reflect the Department's current position.
With respect to (c) above, it is the Department's general position that the pledging of property as security for an RCA could be a contribution to the RCA. Consequently, where the employer's line of credit is similarly secured, we are not prepared to confirm that offering security in the form of a charge against the line of credit could not be a separate contribution to the RCA. The issue would have to be decided on a case-by-case basis having knowledge of all the facts. Where the line of credit is unsecured, however, it is our view that a charge against the line of credit would not be a contribution.