2016-0655071R3 Supplemental employee retirement plan

Principal Issues: Whether a corporate reorganization involving the transfer of a SERP creates an RCA.

Position: No.

Reasons: The existing arrangement is an unfunded SERP of Opco that is not an RCA and none of the proposed transactions involving the transfer of the SERP liability to Parentco would create an RCA.

Author: XXXXXXXXXX
Section: Definition of RCA in subsection 248(1); subsection 207.6(1)

XXXXXXXXXX                                                                                                         2016-065507

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling Request
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information subsequently provided by email and in telephone conversations.

To the best of your knowledge and that of the taxpayers involved, none of issues contained in this ruling request are:

(i)   in a previously filed tax return of the taxpayer, a person who is related to the taxpayer, or a Pensioner;

(ii)  being considered by a tax services office or a tax centre in connection with a previously filed tax return of the taxpayer, a person who is a related to the taxpayer, or a Pensioner;

(iii) under objection by the taxpayer, a person who is a related to the taxpayer, or a Pensioner;

(iv)  the subject of a current or completed court process involving the taxpayer, a person who is a related to the taxpayer, or a Pensioner; or

(v)   the subject of a ruling request previously considered by this Directorate.

Our understanding of the facts and relevant transactions, including proposed transactions, is as follows:

Definitions

In this letter, the following terms have the following meanings.

(a) “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended. Unless otherwise stated, all statutory references are to the Act and each reference to a technical tax term has the same meaning as such term has in the Act;

(b)   XXXXXXXXXX

(c)   XXXXXXXXXX means, XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a person not resident in Canada for the purposes of the Act, and a wholly-owned indirect subsidiary of Parent;

(d)   “CanSub” means XXXXXXXXXX, a taxable Canadian corporation within the meaning of the Act;

(e)   XXXXXXXXXX

(f)   “Consent, Assignment and Release Agreement” means, in the respect of each Pensioner, the agreement referred to in paragraphs 18 and 19 that is proposed to be entered into between Opco, Parent and each of the Pensioners;

(g)   “Corporate Group” means Parent, XXXXXXXXXX, Holdco, Opco, Cansub and any other entity not dealing at arm’s length with Parent, Holdco or Opco, taken together;

(h)   “FMV” means fair market value;

(i)   “Holdco” means XXXXXXXXXX, a taxable Canadian corporation within the meaning of the Act;

(j)   “Holdco Class A Preferred Share” means a Class A Preferred Share of Holdco, as described in paragraph 13 below;

(k)   “Holdco Common Share” means a common share of Holdco, as described in paragraph 13 below;

(l)   “Intercompany Amount” means the amount owed by Opco to Holdco, as further described in paragraph 10, below;

(m)   “Opco” means XXXXXXXXXX, a taxable Canadian corporation within the meaning of the Act;

(n)   “Opco Common Share” means a common share of Opco, as described in paragraph 3 below;

(o)   “Opco Class A Preferred Share” means a Class A Preferred Share of Opco, as described in paragraph 3 below;

(p)   “Opco Class B Preferred Share” means a Class B Preferred Share of Opco, as described in paragraph 3 below;

(q)   “Parent” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a person not resident in Canada for the purposes of the Act;

(r)   “Pensioners” means XXXXXXXXXX former executive employees of Opco, each of which is a party to a SERP Agreement, or a surviving spouse of such employee;

(s)   “RCA” means a retirement compensation arrangement, as defined in subsection 248(1) of the Act;

(t)   “SERP Agreement” means, in respect of each Pensioner, an agreement entered into by Opco with such Pensioner pursuant to which Opco is required to fulfil the SERP Obligations; and

(u)   “SERP Obligations” means the obligations of Opco, governed by the SERP Agreements, to pay supplemental executive pension benefits to each Pensioner, or the surviving spouse of such Pensioner, in respect of services rendered by the Pensioner in Canada.

Facts

Opco

1.    Opco was initially incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX, but continued into XXXXXXXXXX pursuant to the provisions of the XXXXXXXXXX on XXXXXXXXXX.

2.    The principal office of the Opco is located at XXXXXXXXXX. Opco files its tax returns at the XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office. Opco’s business number is XXXXXXXXXX and it has a floating taxation year end that falls on the XXXXXXXXXX.

3.    The authorized share capital of Opco consists of the Opco Common Shares, the Class A Preferred Shares and the Class B Preferred Shares, having the following terms,

a)    The Opco Common Shares:

i.    entitle the holders to one vote per share;

ii.   subject to the rights attached to the Opco Class A Preferred Shares and the Opco Class B Preferred Shares, entitle the holders to receive dividends as and when declared by Opco;

iii.  have no redemption entitlements and are not retractable; and

iv.   subject to the rights, privileges, restrictions and conditions attached to the Opco Class A Preferred Shares and the Opco Class B Preferred Shares, entitle the holders to receive the remaining property of Opco on liquidation, dissolution or wind-up of Opco.

b)    The Opco Class A Preferred Shares:

i.    are non-voting;

ii.   entitle the holders to a non-cumulative dividend at a percentage rate varying between XXXXXXXXXX per annum on the stated capital of the Opco Class A Preferred Shares, as and when declared and at the rate fixed by Opco;

iii.  are redeemable and retractable for a price equal to the stated capital the Opco Class A Preferred Shares, together with declared and unpaid dividends;

iv.   upon the liquidation, dissolution or winding-up of Opco, entitle the holders, subject to the entitlements of the Opco Class B Preferred Shares and in priority to the Opco Common Shares, to be paid an amount equal to the stated capital of such shares, together with declared and unpaid dividends.

c)    The Opco Class B Preferred Shares:

i.    are non-voting

ii.   entitle the holders to receive dividends equal in amount to the dividends declared on the Opco Common Shares, as and when declared by Opco;

iii.  are redeemable and retractable for a price equal to the stated capital the Opco Class B Preferred Shares, together with declared and unpaid dividends; and

iv.   upon liquidation dissolution or winding-up of Opco, entitle the holders, in priority to holders of the Opco Class A Preferred Shares and Opco Common Shares, to be paid an amount equal to the stated capital of such shares together with declared and unpaid dividends.

4.    XXXXXXXXXX% of the issued and outstanding Opco Common Shares, Opco Class A Preferred Shares and Opco Class B Preferred shares are owned by Holdco.

5.    Throughout the years XXXXXXXXXX, Opco actively carried on XXXXXXXXXX in Canada. During the peak of its operations Opco had XXXXXXXXXX and since then has not carried on any XXXXXXXXXX operations in Canada. Opco’s current activities consist of managing its investments, liabilities and undertaking any necessary corporate governance and tax compliance activities.

6.    Pursuant to the terms of the SERP Agreements, Opco continues to be obligated to pay SERP Obligations in respect of XXXXXXXXXX Pensioners. With the exception of a guarantee provided by Parent to one Pensioner, the SERP Obligations are not guaranteed by Parent or any other entity in the Corporate Group. Moreover, no assets have been, or are required to be, segregated by Opco or any other entity in the Corporate Group to fund the SERP Obligations. To the best of your knowledge, the SERP Obligations have never created an RCA in any entity within the Corporate Group. The SERP Obligations are payable in Canadian currency.

7.    The following table sets out the relevant facts relating to each SERP Agreement applicable on or about the time of retirement of each Pensioner:

XXXXXXXXXX

8.    Opco owns all of the issued and outstanding shares of CanSub, a corporation incorporated under the provisions of the XXXXXXXXXX. CanSub’s only activity is the holding of certain rights to Canadian domain names which will continue to be retained by Parent through CanSub.

9.    The assets of Opco consist predominantly of cash (or near cash investments) of $XXXXXXXXXX, as at XXXXXXXXXX and the common shares of CanSub. XXXXXXXXXX.

10.   The liabilities of Opco include the SERP Obligations (with a book value at XXXXXXXXXX of $XXXXXXXXXX), which result in annual payments of approximately $XXXXXXXXXX, accrued interest owing to Holdco and the Intercompany Amount. The Intercompany Amount has a principal amount of $XXXXXXXXXX and has been outstanding since XXXXXXXXXX. The Intercompany Amount arose as a result of XXXXXXXXXX that occurred in XXXXXXXXXX. The cost amount of the Intercompany Amount to Holdco is $XXXXXXXXXX. The Intercompany Amount is interest bearing and payable on demand. The SERP Obligations do not take priority over the obligation of Opco to Holdco in respect of the Intercompany Amount.

Holdco

11.   Holdco was initially incorporated under laws of XXXXXXXXXX, but continued into XXXXXXXXXX pursuant to the provisions of XXXXXXXXXX.

12.   The principal office of Holdco is located at XXXXXXXXXX. Holdco files its tax returns electronically, which are received by the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. Holdco’s business number is XXXXXXXXXX and it has a floating taxation year end that falls on the XXXXXXXXXX.

13.   The authorized and issued share capital of Holdco consists of Holdco Common Shares and Holdco Class A Preferred Shares, having the following terms, conditions and attributes:

a)    the Holdco Common shares,

i.    entitle the holders to XXXXXXXXXX per share;

ii.   concurrently with the payment of dividends on Holdco Class A Preferred Shares, entitle holders to receive dividends as and when declared;

iii.  have no fixed redemption entitlement and are not retractable; and

iv.   subject to rights attached to the Holdco Class A Preferred Shares, entitle the holders to receive remaining property of Holdco on liquidation, dissolution or wind-up.

b)    the Holdco Class A Preferred Shares,

i.    entitle the holders to XXXXXXXXXX votes per share;

ii.   entitle the holders to XXXXXXXXXX the amount of dividend per share that may be declared on a Holdco Common Share;

iii.  are not redeemable or retractable;

iv.   upon liquidation dissolution or windup of Holdco, entitle the holder, in priority to holders of the Holdco Common Shares, to be paid an amount equal to the stated capital of the Holdco Class A Preferred Shares owned by the holder (which stated capital is $XXXXXXXXXX);

14.   All of the issued and outstanding Holdco Common Shares are owned by XXXXXXXXXX The paid-up capital in respect of the issued and outstanding Holdco Common Shares is $XXXXXXXXXX.

15.   All of the issued and outstanding Holdco Class A Preferred Shares are owned by Parent. The paid-up capital and stated capital in respect of the issued and outstanding Holdco Class A Preferred Shares is $XXXXXXXXXX.

16.   Neither the Holdco Common Shares nor the Holdco Class A Preferred Shares are “taxable Canadian property” for the purposes of the Act.

17.   Holdco’s assets consist of all of the issued and outstanding Opco Common Shares, Opco Class A Preferred Shares and Opco Class B Preferred Shares, as well as cash (or near-cash assets) of $XXXXXXXXXX, as at XXXXXXXXXX, and a receivable in respect of the Intercompany Amount.

Proposed Transactions

18.   Pursuant to the terms of a Consent, Assignment and Release Agreement that will be entered into with each Pensioner, each Pensioner will permit Opco to assign to Parent, and Parent to assume from Opco, the SERP Obligations owed to the Pensioners under their respective SERP Agreements and each Pensioner will agree to release Opco and, to the extent necessary, Holdco, from any and all liability related to, or in connection with, the SERP Agreements and the SERP Obligations.

19.   Pursuant to the terms of the Consent, Assignment and Release Agreements, Opco will assign to Parent, and Parent will agree to assume, all of the SERP Obligations for no consideration. Neither Parent, nor any other entity in the Corporate Group, will be required to, or will, “ear-mark” or segregate any of its assets, or purchase a specific asset to secure or fund the SERP Obligations.

20.   Opco will transfer certain of its assets, if any, that have accrued gains to Holdco for cash consideration equal to the FMV of such assets so transferred.

21.   Opco will be wound up in a manner to have subsection 88(1) of the Act apply. Specifically, as part of the winding up,

a) Opco will reduce the stated capital and paid-up capital in respect of the Opco Common Shares, Opco Class A Preferred Shares and Opco Class B Preferred Shares to $XXXXXXXXXX, respectively.

b)    Opco will transfer all of its assets to Holdco, which assets will include cash deposits or near-cash investments and the common shares of CanSub;

c)    Holdco will assume all of Opco’s liabilities which, for greater certainty, will not include the SERP Obligations that will have already been assumed by Parent; and

d)    The Intercompany Amount will be eliminated by operation of law on the wind-up. An election pursuant to the provisions of subsection 80.01(4) of the Act will be filed to deem the amount paid by Opco in satisfaction of Opco’s obligation in respect of the Intercompany Amount to equal the cost amount of the Intercompany Amount to Holdco.

22.   No portion of the cash deposits or near-cash investments that become assets of Holdco as a result of the winding-up of Opco will be required to be “ear-marked” or segregated to secure the SERP Obligations assumed by Parent. Furthermore, neither Holdco nor any other entity in the Corporate Group, will be required to, or will, “ear-mark” or segregate any of its assets, or purchase a specific asset to secure or fund the SERP Obligations that have been assumed by Parent.

23.   Holdco will be wound-up. Specifically, as part of the winding up,

a)    Holdco will settle all of its liabilities.

b)    Holdco will transfer sufficient assets to Parent, to satisfy the liquidation entitlements associated with the Holdco Class A Preferred Shares owned by Parent. The assets are expected to consist of cash deposits, in addition to the assets received as a consequence of the proposed transactions outlined in paragraphs 20 and 21, above, which will include the common shares of CanSub.

c)    To the extent that there are any assets of Holdco remaining after the liquidation entitlements of the Holdco Class A Preferred Shares are satisfied, such assets will be transferred to XXXXXXXXXX to satisfy the liquidation entitlement of the Holdco Common Shares.

24.   No portion of the cash deposits or near-cash investments that become assets of Parent as a result of the wind-up of Holdco will be required to be, or will be, “ear-marked” or segregated to secure the SERP Obligations that were assumed by Parent from Opco prior to the commencement of the winding-up of each of Opco and Holdco.

25.   Opco will be dissolved pursuant to XXXXXXXXXX.

26.   Holdco will be dissolved pursuant to XXXXXXXXXX.

27.   As part of the series of transactions that includes the Proposed Transactions, XXXXXXXXXX will not be making a distribution of cash, directly or indirectly, to Parent.

28.   The common shares of CanSub will remain outstanding and, as a result of the above transactions, will be held by Parent.

Purpose of the Proposed Transactions

29.   Since neither Opco nor Holdco carries on significant operations or undertakings in Canada, Parent has determined that it is no longer economical or efficient for resources to be devoted to ensure appropriate corporate governance and tax compliance with respect to these entities. Consequently, the purpose of the proposed transactions is to wind-up and dissolve each of Opco and Holdco.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and the purpose of the transactions, and provided further that the transactions are completed in the manner described above, we rule as follows:

A.    No portion of the cash or near cash investments distributed by Opco to Holdco as part of the winding up of Opco will be considered to be subject property of an RCA for the purposes subsection 207.6(1) of the Act, or a “contribution” made to an RCA, in respect of the SERP Obligations that will be assumed by Parent prior to the commencement of the winding-up of each of Opco and Holdco; and

B.    None of the assets of Parent and no portion of the cash or near cash investments distributed by Holdco to Parent as part of the winding up of Holdco will be considered to be subject property of an RCA for the purposes of subsection 207.6(1) of the Act, or a “contribution” made to an RCA, in respect of the SERP Obligations that will be assumed by Parent from Opco prior to the commencement of the winding up of each of Opco and Holdco.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the proposed transactions described in paragraphs 18 to 28 are implemented on or before XXXXXXXXXX.

Comments

This letter is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein. This letter is based solely on the facts and transactions described above and makes no comment on the tax treatment of any taxpayers other than those explicitly referenced. The documentation submitted with your request that is not described above does not form part of the facts and transactions and any references to the documentation are provided solely for the convenience of the reader.

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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