Revenue Canada Taxation Head Office
XXX
W.C. Harding (613) 957-3499
August 18, 1988
Dear Sirs:
This is in reply to your letter of July 26, 1988 requesting a technical interpretation with respect to certain matters concerning Employee Benefit Plans (EBPs), Retirement Compensation Arrangements (RCAs) and Salary Deferral Arrangements (SDAs).
In your letter you noted that some EBPs, in existence prior to February 26, 1986, contain provisions for the payment of the plans' income on an annual basis to the plans' employer/contributors. These plans, however, have further provisions under which each employer is obliged to re-contribute a like amount back into the plans.
You also noted that the coming-into force provisions, governing the introduction of the SDA and RCA legislation, may have varied application with respect to the re- contribution of amounts into such plans depending upon one's interpretation of the facts. You have therefore asked for our confirmation that the provisions of the Income Tax Act (the "Act") concerning RCA's do not apply to the re-contributions to these plans.
Whether a plan is an EBP, SDA or RCA depends upon, among other things, the basis of, or purpose for which contributions are to be made to it. For example, if a plan is for the purpose of funding current benefits, it will likely be an EBP. Where it is to provide retirement income it will be an RCA and finally if it is intended to defer otherwise currently taxable employment income it will likely be an SDA.
An SDA and an RCA are mutually exclusive by virtue of the basic nature of their respective purposes. A plan may, however, be in combination, partly an EBP, SDA and RCA. In such cases, the provisions of subsections 6(14) and 56(10) of the Act may have application.
The application of the legislation is however subject to the coming-into-force provisions for SDAs and RCAs. These provisions may in themselves have the effect of partitioning a plan into its component parts which would then be treated as noted above.
In respect of a plan which was an EBP prior to February 26, 1986 and thereafter an SDA, we agree that by virtue of the coming-into-force provisions for SDAs, that to the extent a deferred amount under the plan is in respect of:
(a) services rendered by the taxpayer before July 1986; or
(b) services rendered by the taxpayer after June 1986, where the taxpayer is obliged to defer receipt of the amount and cannot cancel or otherwise avoid that obligation,
the plan will continue to be an EBP and will also be an SDA in respect of any further contributions. We also confirm that, in our opinion, neither the EBP nor the SDA components of such a plan would be an RCA at any time in accordance with the exclusion provided in paragraph (k) of the RCA definition contained in subsection 248(1) of the Act.
At the 1985 Tax Conference, Revenue Canada stated its positions with respect to the annual payout of a plans' income to an employee when it is subsequently re-contributed to the plan:
"In order to be recognized as an income beneficiary, the employer must have unrestricted right, title, and use of the income allocated to the employer. A payment that is conditional upon its repayment to the trust would not be accepted as a bona fide payment by the trust; therefore it is the Department's position that such income should be taxed in the hands of the trust and not in the hands of the employer."
In consequence, an amount paid out of an EBP in your circumstances will not be deductible to the trust nor included in the income of the employer and where it is subsequently re-contributed to the plan at a time when the plan is an SDA, it is our opinion that the amount will also be excluded, for purposes of the SDA legislation, from being a deferred amount by virtue of it being an amount in respect of services rendered by the employee before July 1986.
Where an EBP which did not become an SDA but instead became an RCA effective from January 1, 1988 it is our opinion that notwithstanding that the payments from the EBP trust to the employer are not deductible from the income of the EBP trust, the recontributions by the employer to the plan, if made after December 31, 1987, will be considered to be contributions to a "statutory arrangement" as that term is defined in the coming into force provisions of the RCA definition contained in subsection 248(1) of the Act and therefore subject to 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 unless a provision in the plan otherwise provides (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.
The foregoing is an expression of opinion only and is not binding on the Department.
Yours truly,
for Director Financial Industries Division Rulings Directorate