9 September 2008 Roundtable, 2008-0270531C6 - 2008 CALU Question 5, SDAs and pensions

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: Would certain provisions support the conclusion that an arrangement is a SERP and not an SDA?

Position: A number of factors need to be considered in determining whether a particular plan is a SERP or an SDA.

Reasons: An SDA includes an arrangement under which a person has a right to receive an amount after the end of the year and it is reasonable to consider that one of the reasons for the establishment of the right is to postpone tax payable on an amount of employment income the person would otherwise have received in the year. Hence, if an employer creates any form of plan that provides such a right and the employment income that an employee would otherwise receive is reduced as a consequence of the creation of the arrangement, then the arrangement could be an SDA.

The definition of an SDA excludes the treatment of certain types of arrangements, including registered pension plans, as SDAs but does not exclude unregistered pension plans. However, the CRA has previously stated that a plan will not be treated as an SDA where the plan has the characteristics of an unregistered or supplementary pension plan and the amounts that may be paid out of or under the plan can be considered to be reasonable superannuation or pension benefits. When a plan provides benefits that are not reasonable superannuation or pension benefits, the CRA is of the view that an SDA will exist. Accordingly, to determine if a particular arrangement is an SDA, all of the terms of the particular arrangement must be considered.

CALU ROUNDTABLE - APRIL 2008

Question 5

Supplementary Executive Retirement Plans

A continuing issue for employers is fashioning post-retirement plans for lateral and mid-life hires when such plans cannot be funded out of an existing registered pension plan (RPP). A continuing tax issue resulting from this dilemma is determining whether the proposed plan could be considered to be a salary deferral arrangement rather than a supplementary pension plan.

The CRA has indicated that factors suggesting that a particular plan is a supplementary executive pension plan and not a salary deferral arrangement include whether the plan is a "top-up" to the employer's pension plan, providing benefits that would arise under the RPP but for the limits imposed by the provision of the Act and the regulations. Another factor is whether the plan terms "mirror" the RPP terms.

Question:

In designing a "top-up" arrangement for an executive, employers might look at developing a plan that has a pension formula that takes into account multiples of years of service or salary, or uses delayed vesting beyond the usual two year limit to fashion a plan for a particular executive's situation. These would be points on which the top-up arrangement would not "mirror" the underlying RPP terms. What are the CRA's views on whether such plans could be considered salary deferral arrangements (SDAs)?

CRA's Response:

The CRA has previously stated that a plan will not be treated as an SDA where the plan has the characteristics of an unregistered or supplementary pension plan and the amounts that may be paid out of, or under, the plan can be considered to be reasonable superannuation or pension benefits. Where a plan provides benefits that are not reasonable superannuation or pension benefits, the CRA is of the view that a salary deferral arrangement will exist.

The CRA generally takes the position that supplementary pension benefits will be considered reasonable if the terms of an arrangement are substantially the same as those of the RPP that applies to the same beneficiaries to whom the arrangement applies and the benefits that can be paid under the arrangement are the same as the benefits that would have been paid under the RPP but for the defined benefit or money purchase limit. Where a specific arrangement provides benefits that are not the same as those provided under the registered plan, or are greater than those that could be provided under the registered plan (but for the defined benefit or money purchase limit), then the terms of the arrangement and any other relevant information must be considered to determine if the benefits are reasonable in order to ensure that the plan or arrangement will not be considered an SDA.

When CRA is asked to express its views on whether a particular plan or arrangement is a SDA it must review all the terms of the plan and the factors related to its use in a particular situation in order to determine whether the plan is an SDA.

The CRA cannot provide any definitive answers with respect to any one factor as we would have to look at the arrangement as a whole. However, we would not view the use of multiple years of service or multiple years of salary rather than actual years of service or actual salary as appropriate. In addition, any vesting schedule that is less than the vesting schedule under the pension plan may also not be appropriate.