F. Francis (613)957-3496
November 1, 1988
Dear Sirs:
This is in reply to your letter of October 11, 1988, wherein you requested our views as to whether the following hypothetical arrangement would fall within the definition of a "retirement compensation arrangement" under subsection 248(1) of the Income Tax Act (the "Act"):
1. An employer wishes to provide an employee with a retirement benefit. Accordingly, the employer and employee enter into a written agreement ("retirement agreement") which outlines the amount of potential benefit and the timing of the payments. Generally, the retirement payments will increase with each year of service and payments will be made only on termination.
2. The employee wishes some assurance that the retirement benefit will, in fact, be paid when he retires.
3. In order to provide the employee with the required assurance, the employer purchases a bank letter of credit which simply reduces the employer's line of credit. The bank letter of credit is held by a trustee under a trust agreement whereby the funds are payable directly to the employee only if the employer does not either pay the retiring benefit to the employee under the terms of the retirement agreement and/or the employer does not annually renew the letter of credit. The employee cannot otherwise receive or obtain the use of the funds.
4. The employer pays the bank a fee for providing the letter of credit.
5. The letter of credit is structured such that it is renewable each year by the employer.
6. If the letter of credit is not renewed at the annual renewable date, the full amount becomes payable to the employee immediately.
7. With each year of service, the employee's retirement benefit increases and therefore, the amount of the letter of credit increases.
In our opinion, the fair market value of the letter of credit transferred to the trustee would be considered as a contribution to an RCA and would be subject to refundable tax under subsection 207.5(1) of the Act.
We trust the above comments will be of assistance to you.
Yours truly,
Wayne Douglas
for Director Financial Industries Division Rulings Directorate