Peter Lee (613) 957-2746
February 3, 1988
Dear Sir:
Re: Retirement Compensation Arrangements ("RCA")
We are writing in reply to your letter of December 18, 1987 wherein you requested our opinion on the procedures of reporting income from an RCA and an Employee Benefit Plan ("EBP") in the following circumstances.
An EBP was set up on January 30, 1985 and since then it has not been amended. The purpose of the EBP is to provide income to the key employees of a non-profit organization after their retirement. The EBP falls under the definition of an RCA.
The new RCA provisions of the Income Tax Act (the "Act") as stated in Bill C-64, which received Royal Assent on December 17, 1987, are applicable to the EBP. For the purpose of the Act, the EBP is referred to as the "Existing Arrangement". Another plan (it is referred to as a "Statutory Arrangement" in the Act) is deemed to be established on the day that is the earlier of January 1, 1988, and the day after October 8, 1986 on which the terms of the Existing Arrangement have been materially altered. It is a question of fact whether such terms have been materially altered. The Statutory Arrangement is deemed to be a separate plan independent of the Existing Arrangement. The Existing Arrangement is deemed not to be an RCA within the definition of that expression in the Act. All contributions made under the EBP after the establishment of the Statutory Arrangement and all property that can reasonably be considered to derive from those contributions are deemed to be property held in connection with the Statutory Arrangement and not in connection with the Existing Arrangement.
Therefore, income from the property (including a deferred annuity) in connection with the Existing Arrangement will be subject to the provisions of the Act dealing with an EBP. When an EBP is not a trust, the custodian of the EBP is taxable at the custodian's applicable tax rate on the EBP's income that has not been paid out in the year. For the interest income from a non- individually-owned deferred annuity, a custodian that is a corporation has to report the accrued interest annually. When an EBP is a trust of which employees are the beneficiaries, the trust is taxable on its income determined under Part I of the Act. For the interest income from a non-individually- owned deferred annuity, the trust has to report the accrued interest on a triennial basis unless it elects pursuant to subsection 12(8) of the Act to report accrued interest annually. It is a question of fact whether the EBP is a trust.
On the other hand, income from the property (including a deferred annuity) in connection with the Statutory Arrangement will be subject to the new RCA provisions of the Act. When an RCA is not a trust, it is deemed to be an inter vivos trust pursuant to subsection 207.6(1) of the Act. A custodian of an RCA is required to file an annual return and pay tax at the rate of 50% on the earnings of the RCA. The new RCA provisions of the Act will not supersede the sections of the Act dealing with a deferred annuity (e.g. subsections 12(3), 12(4) of the Act). For the interest income from a non-individually-owned deferred annuity, the trust or the deemed trust of which employees are the beneficiaries has to report the accrued interest on a triennial basis unless it elects pursuant to subsection 12(8) of the Act to report accrued interest annually.
Please find a copy of a News Release of the Department (Retirement Compensation Arrangements Legislation Now In Effect) and Interpretation Bulletins IT-502 and IT-396R attached to this letter. They provide you with details of procedures to be followed in order to comply with the EBP and RCA provisions of the Act.
We hope that our above-noted views, the News Release and the Interpretation Bulletins are helpful to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate