Retirement Compensation Arrangements
The definition of retirement compensation arrangement (“RCA”) in subsection 248(1) is very broad because one purpose of the rules is to prevent avoidance of the Act’s limitations on pension plans. In effect, the RCA rules are intended to ensure that unregistered pension benefits are not accorded the tax benefits of registered plans. However RCAs are now being used, in their own right, as tools to provide benefits to employees over and above those provided under registered plans.
Question
Can the CRA provide any recent interpretative issues regarding the use of RCAs?
Response
The CRA has recently considered arrangements to fund benefits that are to be provided to employees under the provisions of plans that are identified as unregistered pension or supplementary pension plans. CRA has taken the position that these plans will generally be RCAs if the arrangements are pension plans and the benefits being provided are reasonable. Where a plan provides benefits that are not reasonable, the CRA is of the view that a salary deferral arrangement will exist.
The CRA is taking the view that benefits will not be reasonable if, for example, they are more generous than benefits that would be commensurate with the employee’s position, salary and service or they do not take into account benefits that are provided through one or more registered plans.
It has come to the CRA’s attention that innovative tax plans purporting to be RCAs are being marketed and promoted to avoid taxes. Here are some examples: corporations that contribute excessive amounts for the benefit of owner/managers who would receive the amounts after moving offshore, corporations that are attempting to use such arrangements to streamline their long-term profits and corporations that are claiming deductions for contributions that are part of a series of contributions/loan-backs. Tax avoidance schemes purporting to be RCAs will be targeted for review with the aim of, for example, applying the salary deferral arrangement rules, denying deductibility, applying subsection 15(1) and/or subjecting the arrangements to GAAR.