Retirement Compensation Arrangement (RCA)

(Updated June 11, 2008)

• Defined
• CRA Refundable Tax
• Advantages
• Disadvantages
• Investments
• Plan Design Issues
• Coordination of Retirement Savings/Retirement Consumption
• Services Provided by Westcoast Actuaries Inc.
• Fees charged by Westcoast Actuaries Inc.
• Forms

RCA - Definition

A Retirement Compensation Arrangement (RCA) is an arrangement defined in subsection 248(1) of the Income Tax Act (Canada) under which an employer, former employer, or in some cases an employee, makes contributions to a custodian.  The custodian holds the funds in trust with the intent of eventually distributing them to the employee (beneficiary) on, after, or in view of retirement, other severance from employment, or any substantial change in the services the employee provides.  Back to Top

RCA - CRA Refundable Tax

A 50% refundable tax is payable on all contributions to as well as investment income earned by the fund. Specifically,

• When the employer makes a contribution to an RCA, 50% of the contribution is deposited with the custodian, the remaining 50% is remitted to Canada Revenue Agency as a refundable tax.

• When the custodian files the annual trust return (T3-RCA) for the trust, 50% of the net investment income for the year is remitted to Canada Revenue Agency as a refundable tax.  The investment income would include interest and dividends as well as realized capital gains less realized capital losses.

• When benefits are paid to RCA members and beneficiaries, $1 is refunded to the custodian for every $2 of benefits paid.

The refundable tax account at Canada Revenue Agency is not interest-bearing. Therefore, this account is similar to an after-tax savings fund.  Back to Top

RCA - Advantages

• Significantly higher contribution limits than registered plans.
• Immediate deduction to employer and not taxable to employee until paid.
• Flexible investment options.
• Allows deduction at current high tax rates and deferral of recognition of income by employee to future years at potentially lower tax rates.
• High benefit security as funds are held by custodian in trust.
• Flexible settlement options allowing member control over timing of income recognition.
• Does not affect RRSP or RPP (Registered Pension Plan) contribution limits. Back to Top

RCA - Disadvantages

• Refundable tax account is non-interest bearing therefore investment yield for RCA is only half of that of a registered plan with funds invested in interest bearing securities.

• Limited access to funds while employed. Back to Top

RCA - Investments

Unlike registered pension plans, investment rules for RCAs are very flexible.  Plan assets can be invested in stocks, bonds, mutual funds or pooled funds, T-bills, GIC’s, interest in a life insurance policy, etc.  Funds can even be loaned back to Company at reasonable interest rates.  Investments are not subject to a foreign content limit. Back to Top

RCA - Plan Design Issues

Plan design can be on a defined benefit or a defined contribution basis.

• Where coincidental insurance needs exist, a split-dollar universal life policy may be used.  The company is the beneficiary for insurance purposes while the RCA trust owns the cash value.  The cash value is not taxed until distribution, thereby saving the 50% refundable tax on investment income.

• Vesting of benefits – Most pension legislations require the vesting of pension benefits after the completion of two years of plan membership. Therefore, pension benefits provided to members with more than two years of plan membership will be vested immediately.  An RCA allows the employer to have a longer vesting period for retirement benefits than that under a registered pension plan.

• Letter of credit – A letter of credit for funding the RCA would be advantageous if the contribution is deemed to be the cost of the letter of credit (unsecured).  This design would provide benefit security for the executives while eliminating most of the tax-inefficiency due to the 50% refundable tax on contributions.  However, Canada Revenue Agency’s recent position on this type of funding has not been favourable on "secured" letter of credit where Company assets are pledged as collateral.  Their position on the “contribution” seems to be leaning more towards the “face value” of the letter of credit rather than the actual cost the Company is paying the bank for such facility if the letter of credit is "secured". Back to Top

RCA - Coordination of Retirement Savings / Consumption

The general rule of thumb for retirement savings and consumption of retirement funds is that the more tax-effective registered assets (Registered Pension Plan or Registered Retirement Savings Plan) should be on a “First In, Last Out” basis, and the less tax-effective non-registered assets (Retirement Compensation Arrangement) should be on a “Last In, First Out” basis.  Therefore, the perferred sequence is to fund an RCA shortly before retirement and consume RCA assets immediately after retirement prior to drawing an income from registered assets.  Thus, registered assets are allowed to grow tax-free for a longer duration. Back to Top

RCA - Services Provided by Westcoast Actuaries Inc

• Prepare Trust Agreement and Plan Text.
• Prepare and submit the T733 Form (Application for a RCA Account Number) to Canada Revenue Agency.
• Remit 50% refundable tax on Company contributions to Canada Revenue Agency.
• Remit with holding taxes on distributions (payments) from RCA.
• Prepare and file T3-RCA tax returns and remit refundable tax, if any, on investment income to Canada Revenue Agency after end of year.
• Prepare T735 – Application for a Remittance Number for Tax Withheld From a RCA and file with Canada Revenue Agency at benefit commencement.
• Prepare T4A-RCA and T4A-RCA Summary or if applicable NR4 and NR4 Summary to report benefits paid from RCA.
• Prepare and file T737 RCA Summary and Supplementary to report Company contributions. Back to Top