2021-0887611R3 Defined Contribution SERP

Principal Issues: Will the proposed SERP be an SDA?

Position: No.

Reasons: The SERP will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.

Author: XXXXXXXXXX
Section: 248(1) "salary deferral arrangement", 147.1(8)

XXXXXXXXXX                                                        2021-088761


XXXXXXXXXX, 2021


Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request – XXXXXXXXXX Plan (“Supplementary Plan”)
XXXXXXXXXX (the “Taxpayer”)

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, a Supplementary Plan Participant, or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayer, a Supplementary Plan Participant, or a related person; or

C. the subject of a current or completed court process involving the Taxpayer, a Supplementary Plan Participant, or a related person; or

ii. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Definitions

Unless otherwise stated:

(i) all references to a statute are to the relevant provision 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 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.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“Beneficiary” means the person or persons last designated by the Participant in accordance with the Supplementary Plan to receive a payment from the Supplementary Plan in the event of the death of the Participant. If there is no such person or persons who survive the Participant, “Beneficiary” shall mean the Participant’s estate.

“Capped Pensionable Salary” means the Participant’s Pensionable Salary capped at $XXXXXXXXXX in XXXXXXXXXX and increased each calendar year after XXXXXXXXXX by the percentage increase in the Defined Benefit Limit for that calendar year over the previous calendar year.

“Current RPP” means the XXXXXXXXXX Pension Plan, registration number XXXXXXXXXX.

“CRA” refers to the Canada Revenue Agency.

“Defined Benefit Limit” has the meaning assigned by subsection 8500(1) of the Regulations.

“Effective Date” means XXXXXXXXXX.

“Eligible Employee” means an employee of the Employer who is a member of the New RPP and employed in a class of employees eligible to participate in the Supplementary Plan and who is not eligible to participate in any other supplemental pension arrangement maintained by the Employer.

“Eligible Salary” means the Participant’s Full-time Equivalent Percentage multiplied by the amount by which the Participant’s Capped Pensionable Salary for the calendar year exceeds the Participant’s Threshold Salary for that calendar year.

“Employer” means XXXXXXXXXX.

“Full-time Equivalent Percentage” means the percentage that an Eligible Employee’s regularly scheduled appointment by the Employer at any one point in time bears to the regularly scheduled appointment by the Employer of a full-time employee in the same or similar category of employment, calculated to the nearest second decimal place, to a maximum of XXXXXXXXXX%.

“New RPP” means the XXXXXXXXXX Pension Plan XXXXXXXXXX, registration number XXXXXXXXXX.

“Paragraph” refers to a numbered paragraph in this letter.

“Participant” means an Eligible Employee who has become a member of the Supplementary Plan in accordance with its terms, as described in Paragraph 13.

“Pensionable Salary” means the Participant’s XXXXXXXXXX% full-time earnings annual base salary, including XXXXXXXXXX but excluding all other payments.

“Plan Year” means the XXXXXXXXXX period starting on XXXXXXXXXX and ending on the following XXXXXXXXXX.

“Proposed Transactions” means the transactions described in Paragraphs 9 to 30.

“Retirement” means the commencement of a monthly pension from the New RPP for a Participant on their early retirement date, early unreduced retirement date, or normal retirement date under the New RPP, or the commencement of a pension for a Participant who has attained their postponed retirement date under the New RPP.

“Supplementary Plan” means the XXXXXXXXXX Plan as described in Paragraphs 9 to 30.

“Threshold Salary” means an amount equal to $XXXXXXXXXX and increased each calendar year after XXXXXXXXXX by the percentage increase, if any, in the Defined Benefit Limit for that calendar year over the previous calendar year, subject to adjustments to this increase made on the advice of the actuary. Threshold Salary is the same amount as the maximum pensionable earnings for contributions under the New RPP.

FACTS

A complete description of all the relevant facts is as follows:

1. The Employer is a corporation XXXXXXXXXX.

2. The Employer presently maintains a registered defined benefit pension plan, the Current RPP, for its employees.

3. On the Effective Date, employees of the Employer will commence participation in, and accrue benefits under, the New RPP instead of the Current RPP. The New RPP is XXXXXXXXXX.

4. On the Effective Date, the assets and liabilities for service with the Employer prior to the Effective Date will be transferred from the Current RPP to the New RPP.

5. The New RPP will provide defined benefit pensions to members in accordance with the terms of the New RPP and the requirements of the Act and Regulations, in particular, sections 147.1 to 147.4 of the Act and Part LXXXV of the Regulations.

6. The benefit formula under the New RPP provides an annual pension commencing on the member’s normal retirement date that is generally equal to XXXXXXXXXX% of the member’s best average earnings up to an average of the Year’s Maximum Pensionable Earnings (“YMPE”) under the Canada Pension Plan, plus XXXXXXXXXX% of the member’s best average earnings in excess of that average YMPE. Best average earnings is subject to a maximum that ensures that the benefits do not exceed the Defined Benefit Limit. For service prior to the Effective Date, the New RPP will instead replicate the benefits earned under the Current RPP.

7. Members of the New RPP are required to contribute XXXXXXXXXX% of their pensionable earnings up to the YMPE and XXXXXXXXXX% of their pensionable earnings above the YMPE up to a maximum. The Employer will make the same contributions as members to the New RPP.

8. For service on or after XXXXXXXXXX, the benefit formula and contribution rates under the New RPP will be based on the Year’s Additional Maximum Pensionable Earnings under the Canada Pension Plan rather than the YMPE.

PROPOSED TRANSACTIONS

The Taxpayer proposes to engage in the transactions contemplated herein.

9. Subject to a favourable ruling from the CRA, the Employer will establish a new plan (“Supplementary Plan”) on the Effective Date, being the date that the employees of the Employer will commence participation in, and accrue benefits under, the New RPP.

10. The Supplementary Plan is a notional defined contribution supplementary plan.

11. The Supplementary Plan will only provide supplemental account benefits for service on and after the Effective Date.

12. The Supplementary Plan is not in lieu of or on account of other compensation that Participants would otherwise be entitled to receive.

13. An Eligible Employee will become a Participant in the Supplementary Plan on (i) the Effective Date if the Eligible Employee’s Pensionable Salary exceeds the Threshold Salary on the Effective Date, or (ii) the first day of the month coincident with or next following the month in which an Eligible Employee’s Pensionable Salary exceeds the Eligible Employee’s Threshold Salary.

14. During each Plan Year, each month a Participant’s notional account will be notionally credited by an amount equal to XXXXXXXXXX% of the Participant’s Eligible Salary multiplied by 1/12. A Participant’s Eligible Salary shall be calculated as at the first day of each month for purposes of calculating the monthly notional credit amount.

15. On the last day of each Plan Year, the notional balance held in the Participant’s notional account shall be notionally credited with notional investment returns (positive or negative) that generally correspond to the return earned by the New RPP.

16. The Participant’s participation in the Supplementary Plan shall be suspended for the period of time that the Participant is participating in another supplemental pension arrangement maintained by the Employer. For that period of time, the Employer shall not make notional credits to the Participant’s notional account, but the Participant’s notional account shall be credited with notional investment returns.

17. A Participant will not be entitled to receive any amounts credited to the Participant’s notional account until the earliest of the Participant’s termination of employment, Retirement under the New RPP, or death.

18. If a Participant terminates employment with the Employer for any reason other than Retirement or death, the Participant shall be entitled to receive from the Employer an amount equal to notional balance held in their notional account as a single lump sum payment.

19. Upon a Participant’s Retirement, the Participant may elect to receive their notional account balance as a single lump sum payment from the Employer within XXXXXXXXXX days following Retirement, or in annual instalment payments from the Employer over a period not exceeding 10 years. Such election must be made prior to the Participant’s Retirement. If a Participant fails to make an election in the form prescribed by the Employer prior to the date of the Participant’s Retirement, the Participant shall be deemed to have elected annual instalment payments from the Employer over a 10 year period.

20. If, on the date of the Participant’s Retirement, the Participant’s Notional Account Balance is less than XXXXXXXXXX% of the Participant’s Threshold Salary on that date, the Participant’s benefit entitlement shall be paid in a single lump sum payment.

21. Where instalments are payable under Paragraph 19, the Participant’s remaining notional account balance shall continue to be credited with notional returns until the last instalment has been paid.

22. If a Participant dies following the commencement of instalment payments under Paragraph 19, an amount equal to the Participant’s remaining notional account balance on the date of the Participant’s death, will be paid by the Employer to the Participant’s Beneficiary in a single lump sum payment.

23. If a Participant becomes re-employed by the Employer, rejoins the New RPP following Retirement and is in receipt of instalment payments under Paragraph 19, the Participant shall be eligible to recommence participation in the Supplementary Plan. Any remaining annual instalments payable will be suspended by the Employer. Upon the Participant’s subsequent Retirement under the New RPP, the Participant shall be entitled to make a new election as described in Paragraph 19 regarding the payment owing from the Employer in respect of the Participant’s then current notional account balance held under the Supplementary Plan.

24. If a Participant dies while employed by the Employer, the Participant’s Beneficiary shall be entitled to receive an amount equal to the notional balance held in the Participant’s notional account in a single lump sum payment from the Employer.

25. All payments made under the Supplementary Plan by the Employer, whether paid in a single lump sum payment or in annual instalments, shall be subject to applicable withholding tax.

26. The Employer will not fund or provide security for, and is in no way obligated to fund or secure, any amounts payable under the Supplementary Plan.

27. For financial accounting purposes, the Employer may periodically set aside assets as “funds for a specific purpose” in respect of the Employer’s obligations under the Supplementary Plan. However, any such assets that are set aside shall not constitute trust property, will be available to satisfy the claims of creditors, may be used for any other purposes that the Employer may determine from time to time, may be commingled with other assets of the Employer, and shall not be subject to any direct claim by Participants. Participants shall have no rights to any funds set aside by the Employer in respect of its obligations under the Supplementary Plan.

28. The Participant’s notional account is strictly a bookkeeping account.

29. Benefits under the terms of the Supplementary Plan shall be paid out of the Employer’s general revenues.

30. A Participant shall neither be required nor permitted to make any contributions to the Supplementary Plan.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to provide supplemental retirement benefits to Eligible Employees of the Employer on employment earnings that are not otherwise recognized for pension purposes under the New RPP as a result of the application of the Defined Benefit Limit.

RULINGS GIVEN

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 Supplementary Plan will not be a salary deferral arrangement as defined in subsection 248(1).

B. The Supplementary Plan will not be a retirement compensation arrangement as defined in subsection 248(1).

C. No amount will be included in the income of a Participant under subsection 5(1) or paragraph 6(1)(a) as a result of, in and by itself, the Participant’s participation in the Supplementary Plan.

D. Any payment made under the terms of the Supplementary Plan to a Participant or a Participant’s Beneficiary will be included in the income of the recipient in the year the payment is received as a superannuation or pension benefit under subparagraph 56(1)(a)(i).

E. Subsection 12(4) will not apply to a Participant to include any amount in computing the Participant’s income for a year as interest in respect of any entitlements that the Participant may have with respect to the Participant’s notional account balance.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2021 and are binding on the CRA provided that the Proposed Transaction described in Paragraph 9 is completed by 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.

COMMENTS

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.

Yours truly,



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

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