Peter K. Noack (613) 957-8953
December 22, 1986
Dear Sirs:
Re: XXXX
This is in reply to your letter of November 10 concerning a proposed plan to fund retirement gratuities through an "employee benefit plan" as defined in subsection 248(1) of the Income Tax Act. You request that we confirm the tax status of the plan and the tax consequences of administering such a plan. You have enclosed draft copies of the plan and the memorandum of agreement between the XXXX and the participating employee.
Requests for confirmation of the tax consequences of proposed specific transactions must be made in the form of an application for an advance income tax ruling. We cannot provide rulings in respect of our interpretation of specific provisions of the law unless the law has been passed. For your assistance, we enclose a copy of our Information Circular 70-6R on the subject of advance income tax rulings.
You should note that Clause 16 of the Notice of Ways and Means Motion to Amend the Income Tax Act introduced on October 9, 1986, proposes to impose a special refundable tax of 50% on contributions to a "retirement compensation arrangement" and on any income derived from such contributions. A "retirement compensation arrangement" is proposed to be defined as "a plan or arrangement to which contributions are made by an employer to a custodian and under which the custodian may be required to make payments to the employee on, after or in contemplation of the employee's retirement or loss of office or employment but does not include a registered pension plan, a profit sharing plan, other statutory plans, a salary deferral arrangement, certain plans or arrangements established for the benefit of non-resident employees and professional athletes and other prescribed arrangements".
We take the view that interest income earned in a year by a trust governed by an employee benefit plan that is paid in the year to the employer on condition that it be recontributed to the plan by the employer is taxable income of the trust.
Yours truly, for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch