2013-0511051E5 Employer loan to RCA

Principal Issues: The taxpayer requests our opinion regarding whether an amount paid by an employer to an RCA constitutes a contribution to the RCA.

Position: Question of fact.

Reasons: It is a question of fact whether an amount paid by an employer to an RCA is a contribution or a bona fide loan. In order to make such a determination, it is necessary to review all of the relevant facts and documents surrounding a particular situation.

Author: Podor, Karina
Section: 248(1), 207.5(1), 20(1)(r)

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                                                                                                                                   2013-051105
                                                                                                                                   K. Podor

January 12, 2015

Dear XXXXXXXXXX:

Re: Loan by employer to retirement compensation arrangement (RCA)

This is in reply to your correspondence dated October 29, 2013, wherein you requested our views concerning whether an amount loaned by an employer to a retirement compensation arrangement (“RCA”) would be characterized as a “contribution” for purposes of paragraph 20(1)(r) of the Income Tax Act (the “Act”) and subject to the “refundable tax” as defined in subsection 207.5(1) of the Act. 

Your correspondence outlines a situation where an employer makes a loan to the RCA equal to or less than the refundable tax balance.  Following receipt of these funds, the RCA will pay a lump-sum amount to an employee to terminate their participation in the RCA.  The refundable tax received by the RCA on the distribution to the employee will be used to repay the employer loan in the following year.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, “Advance Income Tax Rulings and Technical Interpretations”.

Our Comments

An RCA is defined in subsection 248(1) of the Act.  In general, an RCA is a plan or arrangement under which contributions are made by an employer of a person to a custodian in connection with benefits that are to be or may be received by any person on or after the retirement, loss of employment, or a substantial change in the services rendered by the person.  Where an employer makes a contribution, that is reasonable in the particular circumstances, to an RCA trust, the contribution is deductible by the employer under paragraph 20(1)(r) of the Act, subject to section 67 of the Act, and attracts Part XI.3 refundable tax. 

It is a question of fact whether an employer makes a bona fide loan or a contribution to an RCA.  Whether a bona fide loan has been made in a particular situation is a mixed question of law and fact.  In general, the determination of whether a transfer of property to an RCA trust constitutes a bona fide loan will depend on, among other things, the facts of the particular situation, the terms and conditions of the arrangement, and the law.

Regarding the situation you have outlined in your correspondence, we do not have sufficient information in respect of, among other things, the terms and conditions of the loan agreement to provide further comments.   

We trust our comments will be of assistance.

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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