G. Kauppinen (613)957-3495
March 11, 1988
Dear Sirs:
This is in reply to your letter dated February 18, 1988 regarding retirement compensation arrangements ("RCA") under the Income Tax Act ("Act").
Your first question relates to a situation where a plan or arrangement established prior to October 9, 1986 (and not materially altered thereafter) which was an "employee benefit plan" pursuant to the definition contained in subsection 248(1) of the Act becomes an RCA on January 1, 1988 pursuant to the coming-into-force provisions thereof.
We agree with your interpretation that, pursuant to subsection 56(10) of 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.
Your second question is whether or not payments out of an RCA would qualify as "earned income" as defined in subparagraph 146(1)(c) of the Act.
We agree with your interpretation that payments out of an RCA, if they are retiring allowances or payments out of a pension or superannuation plan pursuant to the definitions thereof contained in subsection 248(1) of the Act, would qualify as earned income. We would point out however, that the definition of an RCA, pursuant to subsection 248(1) of the Act contemplates payments not only on the retirement or loss of office of the taxpayer, but also "after or in contemplation of any substantial change in the services rendered by the taxpayer." If the payments are as a result of a substantial change in services but not a termination of services or a payment on retirement but not in recognition of long service then the payments would not be retiring allowances. Furthermore, depending upon the terms of the plan, it is possible that the payments would not be out of a "superannuation or pension plan" pursuant to the definition thereof in subsection 248(1) of the Act. Consequently, it will depend upon the facts of a given situation whether payments out of an RCA will qualify as earned income.
These opinions are our best interpretation of the law as it applies generally however they are not binding on this Department.
We trust the foregoing is of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate