January 17, 1989
Financial Industries Division Wayne Harding 957-3499
This is in reply to your memorandum of December 15, 1988 wherein you asked for our comments in respect of your proposed policy committee presentation and draft press release.
1. Policy Committee Presentation.
a. Issue/Problem. The following excerpt from our letter to the legal firm in question could be included to fully detail our technical opinion on this matter:
"At the 1985 Tax conference, Revenue Canada stated its position in this regard as follows:
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.
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 (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."
b. Under Issue/Problem, the third paragraph should be eliminated. Only normal contributions have been stopped, "Recontributions" have been continued and these, as noted above, could be to an RCA. We also note that under certain other conditions EBPs could become RCAs hence it is misleading to say that there is no possibility that they are RCAs.
c. Consultation: Mr. Harding's view that option 1 was the best choice was given in the context that it best met the objectives of assessing in this matter, as those objectives were expressed at the conclusion of the meeting. Our views on this matter are as expressed above in our published opinion. In our view, any deviation from this must be implemented by your Division.
2. Press Release
a. The subject plans do not necessarily require repayment in the "following year", just that the amount be subsequently recontributed.
b. All references to Salary Deferral Arrangements should be eliminated to simplify the release and reduce the use of possibly confusing technical terms. In paragraph 1 the phrase "of previously undeclared trust plans for Salary Deferral Arrangements" could be replaced with "of trusts for various employment plans and arrangements". In paragraph 2, "Some salary deferral arrangements" could be changed to "Some plans".
c. In the 3rd paragraph, the 2nd sentence could be removed as it is not necessary to the release. Income of a plan trust does not have to be paid out on a yearly basis but may be taxed in the trust.
Wayne Douglas
for Director Financial Industries Division Rulings Directorate