Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Will the proposed Supplemental Plan be an SDA?
Reasons: The Supplemental Plan will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.
Section: 248(1) "SDA", 146(1) "RRSP deduction limit", section 5 of ITCIA “periodic pension payment”
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling (“Ruling”) on behalf of the above-named taxpayer. We also acknowledge the information provided by email and in telephone conversations.
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the taxpayer or a related person and:
A. being considered by the CRA in connection with such return;
B. under objection by the taxpayer or a related person; or
C. the subject of a current or completed court process involving the taxpayer or a related person; or
ii. the subject of a Ruling request previously considered by this Directorate.
Unless otherwise stated: (i) all references to a statute are to the relevant provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act) or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations); (ii) all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition; (iii) all references to monetary amounts are in Canadian dollars; and (iv) the singular should be read as plural and vice versa where the circumstances so require.
In addition, unless otherwise noted, the following terms have the meanings ascribed to them below:
(a) “Beneficiary” means such person as is designated by a Member or Former Member in writing, in the form and manner prescribed by Employerco for such purpose, to receive benefits payable in accordance with the terms of the Supplemental Plan upon the death of the Member or Former Member;
(b) “Company Group RRSP” means the group registered retirement savings plan established by Employerco for its eligible employees in accordance with the Act including any changes, amendments or modifications which have been made or which may be made from time to time by Employerco;
(c) “CRA” means the Canada Revenue Agency;
(d) “Earnings” for a Plan Year means the sum of: (i) the base salary that is paid by Employerco to an Employee or Executive Employee for work done or services rendered to Employerco in respect of such Plan Year; and (ii) the STIP Bonus target amount for the Employee or Executive Employee for such Plan Year as determined by Employerco. For greater certainty, Earnings excludes any severance payments or other similar payments made in connection with a Termination of Employment;
(e) “Effective Date” means XXXXXXXXXX;
(f) “Employee” means a full-time or part-time employee of Employerco who is ordinarily resident and employed in Canada and who is not an Executive Employee;
(g) “Employerco” means XXXXXXXXXX;
(h) “Executive Employee” means the Chief Executive Officer, the President, and any Senior Vice President of Employerco, and any other Employee designated as such by Employerco;
(i) “Former Member” means a Member who has retained an entitlement to benefits from the Supplemental Plan after his or her Termination Date;
(j) “Interest Rate” means the annual average five-year Government of Canada benchmark bond yield as published by the Bank of Canada as of a particular date;
(k) “Member” means an Employee or Executive Employee who has joined the Supplemental Plan pursuant to the terms of the Supplemental Plan;
(l) “Notional Member Account” means the notional account established by Employerco in respect of each Member pursuant to the terms of the Supplemental Plan;
(m) “Plan Year” means the calendar year;
(n) “RRSP” means a registered retirement savings plan;
(o) “STIP Bonus” means the annual performance-based cash incentive bonus plan provided by Employerco to Employees and Executive Employees, (also referred to as the short-term incentive plan), as amended from time to time;
(p) “Supplemental Plan” means an unregistered and unfunded plan that will be established by Employerco for the purpose of providing its Members with additional retirement benefits above those that may be funded by the contributions to the Company Group RRSP, which are subject to the maximum annual limits imposed by the Act on RRSP contributions;
(q) “Termination Date” means the date on which the Termination of Employment of an Employee or Executive Employee occurs;
(r) “Termination of Employment” means the earliest of: (i) the termination of the employment of the Employee or Executive Employee with or without cause by Employerco; and (ii) the cessation of employment of the Employee or Executive Employee with Employerco as a result of the resignation, retirement or death of the Employee or Executive Employee; and
(s) “Threshold Earnings” means, for a Plan Year, an amount equal to the RRSP dollar limit (as defined in the Act) for that Plan Year (prorated in respect of an Employee/Executive Employee in their first and last year of employment with Employerco), multiplied by a fraction, the numerator of which is 100 and the denominator of which is 18.
A complete description of all the relevant facts is as follows:
1. Employerco is a “taxable Canadian corporation” and a “public corporation” for purposes of the Act. It is existing under the laws of the Province of XXXXXXXXXX and its registered office is in the Province of XXXXXXXXXX. The common shares of Employerco are listed on the XXXXXXXXXX. Employerco deals with the XXXXXXXXXX and files its income tax returns at the XXXXXXXXXX.
2. The Employees and Executive Employees of Employerco may participate in the Company Group RRSP, which currently provides that:
(a) an Employee or Executive Employee can elect that an amount between 1% to 9% of their base salary be deducted from each pay and contributed to the Company Group RRSP; and
(b) Employerco matches that Employee’s or Executive Employee’s contribution during the year by making a contribution to the Company Group RRSP up to the lesser of:
(i) 50% of the RRSP contribution limit as established under the Act; and
(ii) 9% of the base salary for the Employee or Executive Employee for that year.
3. Employerco has implemented a performance-based incentive plan that includes the computation, based on employment level and base salary, of an annual STIP Bonus target amount for each Employee or Executive Employee eligible for such a bonus. The actual amount of STIP Bonus paid in respect of an Employee or Executive Employee (referred to herein as the “actual STIP Bonus”) is determined after an annual evaluation of the corporate performance of the Company and the personal performance of such Employee. Historically, the amount of an Employee’s or Executive Employee’s actual STIP Bonus has exceeded the STIP Bonus target amount computed in respect of that Employee or Executive Employee.
The Taxpayer proposes to engage in the transactions contemplated herein.
4. Employerco will amend the terms of the Company Group RRSP, effective as of XXXXXXXXXX, such that the Company Group RRSP will provide that for each taxation year:
(a) an Employee or Executive Employee can elect that an amount of up to 8% of the sum of their base salary and any actual STIP Bonus received in a pay period be deducted from such pay and contributed to the Company Group RRSP; and
(b) Employerco will make a contribution to the Company Group RRSP in an amount equal to the lesser of:
(i) 125% of that Employee or Executive Employee’s contribution during the year; and
(ii) 5/9th of the RRSP dollar limit as established under the Act for that year, or such lower amount as may be specified by the Employee or Executive Employee.
5. The documentation pertaining to the terms of the Company Group RRSP will state that each Employee or Executive Employee that is a participant in the Company Group RRSP is responsible for ensuring that the total amount of the contributions (described in paragraphs 4(a) and 4(b) above) made to that participant’s Company Group RRSP, do not exceed the RRSP contribution limits in the Act, as such limits apply to that participant.
6. Management of Employerco wishes to establish the Supplemental Plan to supplement the Company Group RRSP for Employees and Executive Employees. The terms of the Supplemental Plan provide for the Supplemental Plan to be unfunded and unsecured. As a condition of membership in the Supplemental Plan, each Member must also be a participant in the Company Group RRSP.
7. Under the terms of the Supplemental Plan, at the end of each Plan Year and on the Termination Date of a Member, Employerco will make a notional contribution, by crediting an amount, to the Notional Member Account established for each Member, as follows:
(a) for each Member who is an Employee, Employerco shall make a notional contribution to the Member’s Notional Member Account in an amount equal to the lesser of:
(i) 18% of the excess, if any, of the Employee’s Earnings for the Plan Year over the Threshold Earnings for the Plan Year; and
(ii) 10% of the Employee’s Earnings for the Plan Year less any amounts contributed by Employerco to the Company Group RRSP in respect of the Plan Year for such Employee.
(b) for each Member who is an Executive Employee, Employerco shall make a notional contribution to the Member’s Notional Member Account in an amount equal to the lesser of:
(i) 18% of the excess, if any, of the Executive Employee’s Earnings for the Plan Year over the Executive Employee’s Threshold Earnings for the Plan Year; and
(ii) 15% of the Executive Employee’s Earnings for the Plan Year less any amounts contributed by Employerco to the Company Group RRSP in respect of the Plan Year for such Executive Employee.
8. The Supplemental Plan will further provide that the value of each Notional Member Account shall be increased on XXXXXXXXXX of each year prior to the year that includes the Termination Date of an Employee or Executive Employee, by an amount equal to the value of the Notional Member Account as of XXXXXXXXXX of the prior year multiplied by the Interest Rate as of XXXXXXXXXX of the prior year (with proration of the amount of such increase applying for the year that includes the Termination Date).
9. Subject to a favourable ruling from the CRA, the Supplemental Plan will be established in the year that the ruling is received and at or near the end of that year Employerco will make a notional contribution to the Notional Member Account of each Member, which includes the value of the total amount of the notional contributions that such Member would have been entitled to, if the Supplemental Plan had been established as of the Effective Date.
10. At the time that a Member is entitled to benefits under the terms of the Supplemental Plan, being on Termination of Employment, that Member shall be entitled to the total value of that Member’s Notional Member Account, which shall be distributed, in consecutive annual payments of equivalent amounts payable over a period of ten years, commencing on a date selected by the Member that is no later than one year following the date on which the Member’s entitlement to receive benefits under the Supplemental Plan arises. At the election of the Member, the Member may instead receive distributions as follows:
(a) a cash lump sum payable within 60 days of the date on which the Member’s entitlement to receive benefits under the Supplemental Plan arises; or
(b) consecutive annual payments of equivalent amounts payable over a period of 1-9 years, commencing on a date selected by the Member that is no later than one year following the date on which the Member’s entitlement to receive benefits under the Supplemental Plan arises.
11. The implementation of and participation in the Supplemental Plan, as well as Employerco’s notional contributions under the Supplemental Plan, will not be in lieu of any amounts to which Members would otherwise be entitled by virtue of their employment. In particular, there will be no reduction of salary or wages, that would have otherwise been paid to the Members, in return for the benefits under the Supplemental Plan.
12. Employerco’s practices and methodologies used to date for computing STIP Bonus target amounts and actual STIP Bonuses will not change as a result of, or in connection with, the establishment of the Supplemental Plan.
Purpose of the Proposed Transactions
13. The Supplemental Plan is being established to provide Employees and Executive Employees with additional post-Termination Employment benefits beyond those earned through contributions to the Company Group RRSP, as such contributions are subject to the applicable limits in the Act.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. The Supplemental Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1).
B. The Supplemental Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1).
C. No amount will be included in the income of a Member under subsection 5(1) or paragraph 6(1)(a) as a result of, in and by itself, the Member's participation in the Supplemental Plan.
D. Payments made under the terms of the Supplemental Plan by Employerco, to a Member, Former Member or Beneficiary, will be included in the income of the recipient in the year the amount is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i).
E. Subject to subsection 18(1), section 67 and section 78, subsection 9(1) will apply to allow Employerco to deduct amounts that are paid to a Member, Former Member or Beneficiary under the terms of the Supplemental Plan by Employerco in the taxation year in which Employerco is required to pay such amounts.
F. Subsection 12(4) will not apply to a Member in the Supplemental Plan to require any amount to be included in computing the Member's income for a year as interest in respect of any entitlements the Member may have under the Supplemental Plan.
These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations, dated April 23, 2019 and are binding on the CRA provided that the proposed transactions described in paragraphs 4 to 9 above are completed on or before XXXXXXXXXX.
The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
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 and proposed transactions herein, other than those specifically described in the rulings given above. 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.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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