MODULE 13: UNIT 5 Retirement Compensation Agreement

Question 1

Nature

Answer 1

A retirement compensation arrangement (RCA) is a plan or arrangement under which an employer, former employer, or a non-arm’s length person makes contributions to a custodian, who holds the funds in trust for the purpose of eventually distributing a benefit to the employee, on or after one of the following events:

• Retirement
• The loss of an office or employment
• Any substantial change in services the employee provides

Basically, an RCA is used to provide a supplemental pension, above the limits imposed on registered savings, for highly paid executives

Question 2

Taxation

Answer 2

An RCA trust is subject to a special tax regime:

• An RCA calculates income without any tax preferences. For example, the dividend gross-up and capital gains inclusion rate are not applicable in calculating an RCA’s income. This means that dividends are included in the RCA’s income without the gross-up, and capital gains are fully taxable in an RCA trust
• An RCA pays tax on contributions
• Any tax that the RCA pays is refundable when the RCA makes distributions to its beneficiary

The tax rate (fixed) applicable to an RCA is 50%

Contributions made by a corporation:

• Deducted in the calculation of the corporations taxable income
• not a tax benefit to the employee

Question 3

Contributions

Answer 3

• employer makes contributions

- trustee receives the incoming contributions and manages the RCA account on behalf of the beneficiary

Question 4

Distributions Out of The Plan

Answer 4

Distributions, including periodic payments and lump sum amounts made to a beneficiary out of the RCA trust, are taxable to the beneficiary; the RCA trustee is obligated to withhold tax on distributions

Distributions to a non-resident of Canada are subject to non-resident withholding tax; the Act prescribes a withholding rate of 25 per cent, although this can be reduced

When payments are made from the trust, the RCA trustee can claim a refund of the refundable taxes

Question 5

Deemed RCA

Answer 5

As an anti-avoidance measure, corporate-owned life insurance policies could be deemed an RCA. The deeming rules apply when three criteria are met:

• The corporation owns a life insurance policy
• There is an obligation to pay post-retirement benefits to an employee
• It is reasonable to assume that the life insurance policy was purchased to fund the post retirement benefit. If the deeming rules apply, the employer must also remit applicable withholding tax as if an RCA is in place

Question 6

Filings

Answer 6

Annual Information Return

-In any year that contributions are made to an RCA, the contributing employer must complete and file an information return by the last day of February in the year following the calendar year in which the contributions were made to the custodian