RCAs

Question 1

What is a retirement compensation agreement (RCA)?

Answer 1

A plan under which an employer (or former employer) or non arm’s length person (who sometimes is the employee) makes contribution to a custodian who holds the funds in a trust for the purpose of eventual distributing a benefit of the employee on or after the following:

• retirement
• loss of office or employment
• any substantial change in services the employee provides

Question 2

What is an RCA used for?

Answer 2

Used to provide supplemental pension for highly paid executives

Question 3

What is the taxation on RCA?

Answer 3

• Tax rate is 50%
• Dividend income and capital gains are fully taxable for RCA income. No tax preferences like gross up dividend and capital gains inclusion
• RCA pays tax on contributions
• The tax on contributions is refundable when the RCA makes distributions to its beneficiary

Question 4

How are RCA contributions made by a corporation treated per tax?

Answer 4

• Contributions are tax deductible to the corporation

- Tax free benefit to the employee

Question 5

What are the tax implications of distributions of an RCA?

Answer 5

• Distributions made to a beneficiary out of an RCA trust are taxable to the beneficiary (including periodic payments and lump sum amounts)
• RCA trustee is obligated to withhold tax on distributions
• Distributions to a non canadian resident are subject to a rate of 25%
• RCA trustee can claim a refund of the refundable taxes when payments are made from the trust. Refund is 50% of distributions from the trust made to the trust and forms part of the asset base for future distributions.

Question 6

What are the criteria in which a corporate owned life insurance policy could be deemed as an RCA?

Answer 6

1. Corporation owns the life insurance policy
2. There is an obligation to pay post retirement benefits to an employee using the life insurance as a source of funding for post retirement benefit payments (eg partial withdrawal from policy CSV - CSV)
3. It is reasonable to assume that the life insurance policy was purchased to fund the post retirement benefit.

If these criteria are met, then the employer must also remit the applicable withholding tax as if an RCA is in place.

Question 7

When must the contributing employer complete and file a return when contributions have been made to an RCA?

Answer 7

On the last day of February in the year after the year in which contributions were made to the custodian