|  Retirement
Compensation Arrangement
Definition of a Retirement Compensation Arrangement
(RCA)
The Retirement Compensation Arrangement (RCA) is defined in Section
248(1) of the Income Tax Act (Canada).
The important wording relates in the preamble that contributions
may be made to an RCA by an employer or former employer of a taxpayer
"in connection with benefits that are to be or may be received
or enjoyed after or in contemplation of any substantial change in
the services rendered by the taxpayer, the retirement of a taxpayer
or the loss of an office or employment of the taxpayer."
Allowable Tax-Deductible Contributions to an RCA
Canada Customs and Revenue Agency (CCRA) permits tax-deductible
contributions to an RCA by the employer, or by the taxpayer where
such contributions are required under an employment agreement and
are not greater than those contributed by the employer to the benefit
of the taxpayer. Contributions with respect to a taxpayer must be
reasonable under the circumstances and to ensure that Revenue Canada
cannot attack an arrangement as providing unreasonable levels of
benefits, an Actuarial Certificate should be provided to the Employer
certifying the benefits produced by accumulated RCA contributions
to be reasonable.
Taxation of RCA
The various taxation rules concerning the RCA may be summarized
as follows:
a) RCA Contributions are tax-deductible
b) There is a 50% Refundable Tax on such Contributions
c) There is an additional 50% Refundable Tax (or refund of Refundable
Tax if the calculation produces a negative result) on the following:
* Taxable Investment Income
* less Benefit Payments
* less Expenses of the RCA Trust
Taxable Investment Income is made up of dividends, interest and
realized capital gains but excludes unrealized capital gains and
the investment income of exempt life insurance policies.
Taxation of Benefits received by a Taxpayer from an RCA
Income received by a taxpayer from an RCA is treated in the same
manner as pension income and subject to tax in the normal manner.
However, should the recipient be no longer a Canadian taxpayer as
the result of emigration from Canada, lower tax rates will apply
depending on the applicable Tax Treaty. In the Ireland Agreement
there is no tax whatsoever on "pension" payments provided
they meet the criteria of instalment payments and such payments
do not exceed the following percentages of the market-value of assets
in the applicable accounts at the beginning of the taxation years
in question:
Taxation Maximum Percentage of Year Assets to be Distributed
1. 10%
2. 20%
3. 40%
4. Balance Of Account
"Pensions" are defined as other than lump sum payments
from Registered Pension plans (RPP), RRSPs, RRIFs, RCAs and DPSPs.
It is interesting to note that effective March 1, 2000, RPP and
Locked-In RRSP and LRIF assets with respect to emigrants, who were
formerly Alberta residents, may be unlocked upon leaving Canada.
5. Assets suitable for RCA Investment Purposes
There are no rules or restrictions regarding RCA assets other that
the fact they must comprise bona fide investments. Suitable third-party
assets which will serve to mitigate the 50% Refundable Tax on investment
income include:
* Universal Life Insurance Policies
* Index Equity Funds
* Special RCA Investment Funds which are structured on a buy-and-hold
basis
and invest in Canadian, U.S. and Foreign Equities. Other suitable
investments could include mortgages against property of the taxpayer
or employer and loans with adequate security on a non-arms length
basis.
6. Closely held Companies which should Establish RCAs
When some or all of the following apply, owners of companies should
consider establishing an RCA:
a) Closely Held Companies whose earnings typically exceed the small
business tax limit after paying adequate remuneration to the owners.
b) Closely Held Companies residing in Provinces where Corporation
and Personal Income Taxes are falling
c) Closely Held Companies whose principals have little or no pension
benefits
d) Closely Held Companies whose principals intend to sell at retirement
and emigrate from Canada
7. Implementation of an RCA
Establishing an RCA is much simpler than establishing a Registered
Pension Plan (RPP). Unlike an RPP, an RCA does not have to undergo
vigorous scrutiny from CCRA and Provincial authorities. There are
two general sets of rules regarding the implementation of an RCA,
as follows:
a) RCAs Funded solely with Life Insurance
Such RCAs generally only require, in order to be properly established,
the following:
i) a CCRA Account Number,
ii) a Life Insurance Contract,
iii) a Plan Text,
iv) an Actuarial Certificate, and
v) the completions of an Annual RCA Tax Return.
b) In all other cases, a Trust Deed is required between the employer
and a Trust Company or three individual Trustees, one of whom must
be other than an owner, officer or employee of the Company.
For more information, email us
or contact us at 1-866-927-0111
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