2018-0740741E5 Taxation of supplemental retirement plans

Principal Issues: Whether either of the two supplemental retirement plans (or any of their components) constitute an SDA?

Position: Question of fact.

Reasons: Insufficient information to provide definitive determination. The basic contribution component appears to be largely consistent with the CRA’s general position on supplemental plans to not be treated as an SDA. The bonus contribution and vacation pay contribution components as well as the Retirement Allowance Plan appear to be primarily motivated by tax deferral considerations and would likely constitute an SDA.

Author: Doiron, Wayne
Section: 248(1) salary deferral arrangement, 6(14)

XXXXXXXXXX                                                                                                   2018-074074
                                                                                                                           W. Doiron
January 11, 2019

Dear XXXXXXXXXX:

Re:  Taxation of Supplemental Retirement Plans

This is in reply to your letter of January 19, 2018 in which you inquire about the income tax treatment of employer-provided supplemental retirement benefits under the following two plans. We regret the delay in our reply.

Supplemental Plan

*     An employer sponsors a defined contribution registered pension plan (“RPP”), which requires the employer to make contributions equal to a fixed percentage of each member’s pensionable earnings. The employer also matches any voluntary contributions made by the member.

*     The employer provides an unfunded and unsecured plan for each member of the RPP whose contributions are capped by the RPP limits under the Income Tax Act. (footnote 1)

*     Under each Supplemental Plan, notional contributions (and interest) are allocated to the member’s account based on the same contribution rate as the RPP less the actual employer contributions made to the RPP.

*     The plan also allows the member to elect to reduce or forego future bonus entitlements and accrued vacation pay entitlements for additional allocations (of equal amounts) to the member’s account.

*     At the earliest of the member’s termination of employment, retirement or death, the member is entitled to benefits equal to their account balance payable by the employer as a lump sum, or in annual instalments over a period of up to 10 years.

Retirement Allowance Plan

*     The employer also provides an unfunded and unsecured plan for the accumulation of a retirement allowance benefit for one of its executives.

*     Under the Retirement Allowance Plan, notional contributions are allocated each month to the executive’s account at the rate of 7% of the executive’s remuneration received in the previous month (plus interest).

*     The plan also provides for a one-time $125,000 notional contribution to the executive’s account at the start of the plan.

*     At the earlier of the executive’s termination of employment or attainment of age 65, the executive is entitled to benefits equal to their account balance payable by the employer as a lump sum, or in annual instalments over a period of up to 10 years.

*     The executive is also entitled to severance pay payable on termination of employment or retirement in an amount equal to 24 months of base salary plus an amount in lieu of pension and automobile benefits. This is not part of the Retirement Allowance Plan.

You have requested the CRA’s interpretation regarding the income tax treatment of the benefits payable under the Supplemental Plan and the Retirement Allowance Plan.  Specifically, you have asked that we confirm that the benefits derived from the notional contributions under each of the components of the plans are taxable pursuant to paragraph 56(1)(a) in the taxation year that amounts are paid out of the plan, rather than on an accelerated basis pursuant to the salary deferral arrangement (“SDA”) rules or the doctrine of constructive receipt.

Our comments

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 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

The key issue to determine with regard to your query is whether the plans (or their components) constitute an SDA as defined in subsection 248(1).  Subsection 6(14) provides that when an SDA is part of a larger combination plan providing other benefits, the SDA will be treated as a separate arrangement independent of the parts of the plan that are not an SDA.  Accordingly, each of the three notional contribution components of the Supplemental Plan can be considered separately in determining whether the particular component is an SDA.

Whether a plan constitutes an SDA is a question of fact that can only be determined by a review of the plan and all the relevant facts.  For this purpose, it is necessary to determine, amongst other things, if one of the main purposes of the plan is to postpone tax payable under the Act in respect of an amount that is, or is on account of or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year.

The CRA has previously stated that a plan will not be treated as an SDA where the plan has the characteristics of an unregistered or supplementary pension plan, and the amounts that may be paid out of or under the plan can be considered reasonable superannuation or pension benefits.  Where a plan provides benefits that are not reasonable superannuation or pension benefits, we are of the view that one of the main purposes is to postpone tax payable and an SDA will exist.

The CRA generally takes the position that supplementary pension benefits will be considered reasonable if:

*     the terms of the plan are substantially the same as those of the RPP that applies to the same beneficiaries to whom the plan applies; and

*     the benefits that can be paid under the plan are the same as the benefits that would have been paid under the RPP but for the defined benefit or money purchase limit.

Where a specific plan provides benefits that are not the same as those provided under the RPP, or are greater than those that could be provided under the RPP (but for the defined benefit or money purchase limit), then the terms of the plan and any other relevant information must be considered to determine if the benefits are reasonable in order to ensure that the plan will not be considered an SDA.

With regard to the two plans described above, the basic contribution component of the Supplemental Plan appears to be largely consistent with the CRA’s general position outlined above. We would be pleased to provide a definitive determination on whether it would avoid characterization as an SDA in the context of a request for an advance income tax ruling. However, the bonus contribution and vacation pay contribution components of the Supplemental Plan, as well as the Retirement Allowance Plan, appear to be primarily motivated by tax deferral considerations. In our view, they would most likely constitute an SDA.

We do not have sufficient information to comment on whether constructive receipt might be applicable in the situations described above. For the CRA’s general views concerning constructive receipt, please refer to paragraph 10 of Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts.

We trust our comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act (the “Act”).

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