6 August 1999 External T.I. 9919325 - RCA, SOLE SHAREHOLDER CONRIUBUTIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Will contributions by an employee who is also the sole shareholder of the employer be deductible under paragraph 8(1)(m.2) where a plan, requiring matching employee contributions, is established for the employer's executives?

Position: Question of fact.

Reasons: The provisions of paragraph 8(1)(m.2) would have to be satisfied.

XXXXXXXXXX							991932
M. P. Sarazin

Attention: XXXXXXXXXX

August 6, 1999

Dear Sirs:

Re: Sole Shareholder and Paragraph 8(1)(m.2) of the Income Tax Act (the "Act")

This is in reply to your letter dated February 17, 1999, to the Saskatoon Tax Services Office which was forwarded to us by the Winnipeg Taxation Centre. You requested confirmation that a sole shareholder would be entitled to claim a deduction under paragraph 8(l)(m.2) of the Act for his contributions to a proposed retirement compensation arrangement ("RCA") because he and the executives of the corporation will be required, under the terms of the arrangement, to make matching contributions to the proposed RCA.

Comments

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. However, we can provide you with the following general comments.

Paragraph 8(1)(m.2) was enacted as a relieving provision which would permit, within limits, the deduction of employee contributions where they are required under the terms of an unregistered pension plan that also meets the RCA definition. Consequently, before any amount will be deductible under paragraph 8(1)(m.2), the plan or arrangement has to be a pension plan. This determination can only be made after a review of the terms of the particular plan or arrangement. Where it is established that the plan or arrangement constitutes a pension plan, an employee contribution will be deductible under paragraph 8(1)(m.2) of the Act where all of the following conditions are satisfied:

(a) the amount is paid to a custodian (within the meaning assigned by the definition of an RCA in subsection 248(1) of the Act) of the arrangement who is resident in Canada;

(b) the taxpayer was required, by the employer's conditions of employment, to contribute the amount; and

(c) the amount contributed to the RCA in the year does not exceed the amounts contributed to the RCA in the year by any other person in respect of the taxpayer.

The determination of whether or not a taxpayer is required, by his or her employer's conditions of employment, to contribute to the RCA would require a review of all of the relevant facts in the particular situation. Where a plan or arrangement is established solely for the benefit of the sole shareholder/employee, we would not consider contributions by the sole shareholder/employee to be required under the terms of his or her employment for the purposes of the condition described in clause 8(1)(m.2)(iii)(A) of the Act unless the taxpayers are able to substantiate that the contributions are required under bona fide terms of employment. Where a plan or arrangement is established for a number of the corporation's executives, one of whom is the sole shareholder/employee, this fact could be used to support an argument that the condition in clause 8(1)(m.2)(iii)(A) of the Act may be satisfied. In any case, this determination could only be made after a review of all of the relevant facts.

We trust the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

c.c. Pe&l Fedick
Winnipeg Taxation Centre

Les Haugen
Saskatoon Tax Services Office