24(1) D.S. Delorey
(613) 957-3495Attention: 19(1)
August 17, 1990
Dear Sirs:
This is in reply to your letter of June 18, 1990 concerning the application of the retirement compensation arrangement ("RCA") rules to a plan established before 1986 (the "Plan"). You cite a number of facts relating to the Plan and ask the following questions.
1. Assuming no material alterations to the existing arrangement, can employees who qualify for benefits under the Plan according to the terms of the Plan but who were not members of the Plan prior to January 1, 1988 be added to the Plan and the Plan continue its status as an existing arrangement and deemed not to be an RCA?
2. Are there any restrictions on the investment of funds contributed to the Plan prior to January 1, 1988("Grandfathered funds")? In particular, may the trustee of the Plan use a portion of those grandfathered funds to purchase life insurance policies on the lives of some of the Plan members. In that instance, would the grandfathered funds used to purchase life insurance retain their grandfathered status and not be subject to the deeming rules of an RCA under subsection 207.6(2) of the Income Tax Act (the "Act").
Our Comments Since your questions relate to a factual situation, we are unable to definitively reply thereto without first having knowledge of all relevant facts and having had the opportunity of reviewing all relevant documentation. When questions relate to a proposed plan or to proposed changes to an existing plan, such a review is conducted by this office where the proposed transactions are the subject matter of an advance ruling request submitted in the manner set out in information Circular 70-6R. Otherwise, such a review is conducted by the relevant district taxation office. We nevertheless offer the following general comments.
The definition of an RCA in subsection 248(1) of the Act is applicable after October 8, 1986. However, for plans that existed on that date, the definition will not apply before January 1, 1988 or such earlier date on which the existing plan is materially altered.
A plan that existed on October 8, 1986 will be treated as two separate arrangements on the date the transitional rules make the RCA definition applicable. As indicated above, this date will be January 1, 1988 if the plan has not been materially altered, which we will assume to be the case. The two arrangements will consist of a statutory arrangement that comes into existence on January 1, 1988 and which is treated as an RCA, and an existing arrangement which is not an RCA. Since the existing arrangement is not an RCA, its property and earnings will not be subject to the RCA rules, including the 50% refundable tax. On the other hand, the statutory arrangement will be deemed to receive all property contributed after 1987. 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 not subject to the RCA rules and another trust subject to those rules.As indicated by the above, the tax implications will not change solely as a result of adding new members to a plan. That is, the RCA rules will not apply if no contributions are made to a plan after 1987, regardless or whether or not new members are added thereto. There are no provisions in the Act or its Regulations restricting the type of investments that may be acquired by either of the trusts referred to above. Where either trust uses trust funds to acquire a life insurance policy as an investment, the provisions of subsection 207.6(2) of the Act would normally not apply to such acquisition. The above comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R. We trust however that they are of assistance.
Yours truly, for Director Financial Industries Division Rulings Directorate