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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] (1) Is the plan set up to provide benefits to officers of the Corporation a retirement compensation arrangement (RCA)? (2) Are the amounts paid to the trust governed by that plan deductible in computing the Corporation's income?
Position: (1) No. (2) No.
Reasons: (1) The benefits to be paid would not be reasonable in the circumstances. Position stated at the 2005 APFF and CTF conferences. (2) The amounts paid were not paid to earn income. Furthermore, the amounts are not reasonable. It must be established what a reasonable businessman would have agreed to pay with only the interests of the corporation in mind. When assessing the reasonableness of an expense, an objective element must be sought.
March 29, 2006
XXXXXXXXXX Tax Services Office Headquarters
Audit Division Income Tax Rulings Directorate
Attention: XXXXXXXXXX Michel Lambert
(613) 957-8962
2006-017117
XXXXXXXXXX. - Retirement Compensation Arrangement
This is in response to your memorandum of February 10, 2006, asking us to review the comments you received from representatives of XXXXXXXXXX. (the "Corporation") in response to our memorandum to you of January 4, 2006, number 2005-011580.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
On January 4, 2006, we expressed the opinion that the plan the Corporation has in place is not a retirement compensation arrangement within the meaning of that term in subsection 248(1). Having reviewed the memorandum of February 10, 2006, we remain of the view that the current plan is not a retirement compensation arrangement within the meaning of subsection 248(1).
The Corporation's representatives refer to the Agency's position on RCAs that was communicated at the Roundtable on Financial Products at the 2005 annual conference of the Association de planification fiscale et financière. They quoted the following passage: "where a plan provides for benefits that are not reasonable, it is the CRA's view that it is a salary deferral arrangement". Although not mentioned by the Corporation's representatives, in the same position, the Agency also indicated that in certain cases it could apply, inter alia, the salary deferral arrangement rules, deny the deduction, or apply subsection 15(1) or the anti-avoidance provision. In our view, the view we have reached in this case is not inconsistent with the view expressed at the Roundtable in question.
On the facts, it appears to us that the benefits to be paid under the current plan are not reasonable. It is our opinion that the Corporation would not have made the contributions to the Trustee qua employer of XXXXXXXXXX and XXXXXXXXXX.
The Corporation's representatives are also of the view that section 56(2) does not apply in this case. In particular, they referred to paragraphs 36 and 37 of Peddle v. The Queen (Docket 2001-3563(IT)G). Those paragraphs read as follows:
[36] In other words, subsection 56(2) should not apply where it results in double taxation. The applicability of this so-called fifth condition was confirmed in both the Supreme Court decision of Neuman v. The Queen, 98 DTC 6297 (S.C.C.) and the Federal Court decision of The Queen v. Ferrel, 99 DTC 5111 (F.C.A.).
[37] There was no evidence before me which would indicate whether or not Brunswick paid income tax on the $7,000.00 benefit which it received when its debt to Eagle was paid for nil consideration. It is unlikely Brunswick paid tax. But if it paid tax, the application of subsection 56(2) would result in the inappropriate double taxation which the Federal Court spoke of.
We understand from the comments of the Corporation's representatives that the double taxation would arise from the fact that the trust would be taxed under the provisions of Part XI.3 applicable to retirement compensation arrangements while subsections 15(1) and 56(2) apply to the Corporation’s shareholders. In our view, there is no double taxation. Indeed, the trust will not be taxed under the provisions of the Act applicable to retirement compensation arrangements since, in our view, the current plan is not a retirement compensation arrangement.
In our memorandum of January 4, 2006, we commented on section 67. We stated the following: [TaxInterpretations translation]
In addition, if it is determined that a portion of the contributions made under the Agreement constitute a contribution to a retirement compensation arrangement rather than an appropriation of funds, notwithstanding our view to the contrary, it is our view that such portion of the contributions made may not be deductible from the corporation’s income under section 67.
The Corporation’s representatives made the following comment:
(...) , it is interesting and revealing to note that the author of the opinion considers that even the portion of contributions constituting a contribution to a retirement compensation arrangement (RCA) would not be deductible under section 67 of the Act, regardless of the quantum of that portion.
We have stated that some of the contributions made may not be deductible under section 67, not that section 67 would preclude, without analysis, any deduction for some or all of the contributions made under the plan that would constitute a contribution to an RCA. Our commentary on section 67 does not change our position that the plan is not a retirement compensation arrangement within the meaning of subsection 248(1).
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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