Douglas Watson (613) 957 8960
April 3, 1987
Dear Sir:
This is in response to your letter of January 14, 1987 in which you requested information on Retirement Compensation Arrangements (RCA), Employee Benefit Plans (EBP), and Salary Deferral Arrangements (SDA). In this letter we provide a brief description of the EBP and the SDA with references to additional reference material which we hope will be of assistance to you. As draft legislation for RCA has only recently been released and we have not completed our review of it, we can only direct our comments to what we understand is the intended application of the proposed rules.
The legislation for SDA is applicable to the situation in which salary and the taxes payable thereon, are deferred until a later year. Pursuant to subsection paragraph 248(1) of the Income Tax Act ("Act") SDA are essentially arrangements whereby a person receives a right, in lieu of or on account of salary or wages, to receive an amount in a subsequent year and it is reasonable to consider that one of the main purposes of the existence of the right is to postpone tax payable under the Act. A number of specific arrangements are excluded from being SDA by virtue of the definition thereof in subsection 248(1) of the Act. Pursuant to subsection 6(11) of the Act, an amount in respect of a right obtained under a salary deferral arrangement is deemed to be received, therefore, is taxable in accordance with paragraph 6(1)(a) of the Act. The amount initially to be included in income is the "deferred amount" as determined pursuant to subsection 248(1) of the Act. Subsection 6(12) of the Act extends the deeming provision in subsection 6(11) to interest and other amounts in respect of the deferred amount that accrues to the benefit of that person. Amounts received out of SDA are included in income pursuant to paragraph 6(1)(i) of the Act only to the extent that such amounts are in excess of all deferred amounts previously included in income pursuant to paragraph 6(l)(a). As indicated above, the foregoing is intended to provide a brief overview of SDA and accordingly does not encompass all the provisions of the Act affecting SDA.
It appears that the intended application of the new rules for RCA will encompass arrangements under which an employer makes contributions to a custodian and the custodian may be required to make payments to the employee on, after or in contemplation of the employee's retirement or loss of employment. RCA are to be funded plans which are to be subject to a 50% refundable tax on all contributions to and all income and capital gains accruing in the plan. This tax will be refunded at a rate of $1 for each $2 paid as retirement benefits to the employee. Contributions by an employer to RCA will be deductible in the year in which they are made and the employee will be required to include in income retirement benefits in the year they are received. Employees will not be allowed a deduction for contributions to RCA. RCA do not include SDA described above.
EBP are defined in subsection 248(1) of the Act essentially as arrangements under which contributions are made by an employer to a custodian and under which payments are to be made to or for the benefit of the employer's employees. By definition certain arrangements are excluded including SDA and it is proposed that this definition be amended to exclude RCA. Accordingly, in general terms in determining the nature of any particular arrangement it must first be considered in terms of RCA, secondly in terms of SDA and lastly in terms of EBP. We enclose herewith a copy of Interpretation Bulletin IT-502 , which provides a fairly comprehensive review of EBP and the Department of Finance Release, dated March 27, 1987 concerning the draft legislation on RCA.
We hope that these general remarks and the referenced reading material are of assistance to you. Should you have any specific questions concerning the existing or proposed legislation, we would be prepared to consider them.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch