Retirement Compensation Arrangements

Retirement Compensation Arrangements Introduction When the Department of Finance first introduced new rules governing retirement compensation arrangements (RCA) in 1986, adverse tax consequences associated with RCAs made taxpayers shy away from such arrangements. However, with registered retirement savings plan (RRSP) contribution limits and defined benefit limits, companies offer high-income executives supplemental retirement income plans to fill their potential pension gap upon retirement. These supplemental benefits are being offered despite the fact RRSP and defined benefit limits are increasing. With proper planning, RCAs can be very effective in fulfilling a company s obligations to executives for supplemental retirement benefits. RCAs are sometimes considered in the private company, owner-manager context as a means of setting aside supplemental pension. However, the decrease in corporate tax rates for active business income in recent years has significantly changed the landscape. RCAs for owner-managers compared to paying tax and retaining funds at the corporate level have become even more taxdisadvantaged. Also, the CRA has undertaken an audit initiative relating to RCAs. Auditing RCAs is a relatively easy exercise for the CRA since employers must apply for an RCA account number and send in the RCA trust agreement with this application (Form T733). The CRA has been sending audit inquiry letters to both employers and trustees of RCAs beginning in May of 2010. At the 2011 CLHIA Tax Conference (#2011-0398351C6, Q. 1, dated May 20, 2011), the CRA gave the following status update: The number of RCAs registered in recent years has increased significantly. The refundable tax creates an enormous liability for the government that must be managed. Reviews of these trust arrangements are identifying issues that are of concern to the CRA, including whether a bona fide RCA even exists (versus a salary deferral arrangement for example). The CRA will continue to audit RCAs and any positions taken will be based on the facts of each case.

In addition, the 2012 Federal Budget introduced prohibited investment and advantage rules (new sections 207.61-207.65 and definitions added to subsection 207.5(1) of the Act) based closely on existing rules for TFSAs and RRSPs applicable to RCAs that have a specified beneficiary. A specified beneficiary is an individual who has a significant interest (more than 10%) in the employer or related entity or a person not at arm s length with that employee. The definition therefore includes owner-managers. Generally these measures were introduced to prevent RCA s from being involved in non-arm s length transactions by prohibiting investments in shares or debt, or rights to acquire shares or debt of the contributing employer or entity related to the contributing employer. Front-end leveraged ( FEL ) RCA planning after March 29, 2012 that involves an employer providing retirement benefits for an owner-manager through an RCA that holds life insurance and the RCA borrowing money to loan back funds to the contributing employer or related entity, will be affected by these measures. A prohibited investment already held by an RCA before March 29, 2012 is not subject to the 50% tax on the fair market value of prohibited investments, however, FELRCA s in existence prior to the 2012 Budget may be impacted by the advantage rules (imposing a 100% special tax on the fair market value of an advantage) if commercially reasonable debt servicing is not occurring on the debt from the employer or related entity to the RCA. Two technical interpretation letters are helpful in setting out the requirements of transitional relief provided to existing FELRCAs to ensure advantage rules will not apply. (See #2012-0470181E5 dated February 21, 2013 and #2013-0501941E5 dated October 29, 2013.) The new rules will not apply in respect of an RCA for an arm s length employee who does not have an interest or has less than a 10% interest in the employer. This tax topic will review the rules governing RCAs (assuming the prohibited investment and advantage rules do not apply), discuss some alternatives to funding RCAs and address the accounting treatment of them. Definition of an RCA An RCA is defined under subsection 248(1) of the Income Tax Act (the Act) as a plan or arrangement under which an employer makes contributions to another person, called a custodian, in connection with benefits that are to be or may be received or enjoyed by a person on, after, or in contemplation of a substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of office or employment of the taxpayer. The definition of RCAs in subsection 248(1) of the Act specifically excludes a number of plans, including the following: RRSPs, RPPs, DPSPs, and EPSPs; an employee life and health trust; a group sickness/accident insurance plan; a salary deferral arrangement; and a plan established to defer the salary of certain professional athletes. 2

Employer-owned life insurance is also excluded from the definition of an RCA under subsection 248(1). However, under subsection 207.6(2) of the Act, an arrangement involving life insurance will be deemed to be an RCA if the following conditions are met: the employer is obligated to provide benefits to an employee on, after, or in contemplation of retirement, termination of employment, or a substantial change in the services rendered by the employee; and the employer, former employer, or a person or partnership with whom the employer does not deal at arm s length, acquires an interest in a life insurance policy that may reasonably be considered to be acquired to fund, in whole or in part, those benefits. Question 10 at the 2012 CALU CRA Roundtable (2012-0435771C6) explored the meaning of the phrase may reasonably be considered to be acquired to fund, in whole or in part. The CRA listed the following factors it would consider in determining whether subsection 207.6(2) of the Act would apply to deem a life insurance policy held in connection with an employee retirement plan to be the subject property of an RCA: the identity of the employees whose lives are insured as compared to those to be provided benefits under the plan; the timing of the acquisition of the life insurance and the setting up of the plan; the extent of the monetary coverage under the insurance as contrasted with the value of the benefits under the plan; and reasons (other than the existence of the plan) for the employer s purchase of insurance. For example, we have previously opined that the RCA deeming rule may not necessarily apply to: (i) key man insurance acquired as coverage for losses or damages the employer might suffer on the death of an employee; and (ii) life insurance policies acquired solely to pay benefits in the event of death of an employee. The test is not only applied at the time of acquisition of a policy. The CRA states that the RCA deeming rule can apply even where the life insurance policy is acquired before the retirement benefits become provided. The context of the question was where a life insurance policy is acquired at a particular time and at a subsequent time the employer becomes legally obligated to pay retirement benefits to an employee (Question 10 2012 CALU CRA Rountable). Ultimately it is a question of fact in each circumstance. The CRA has stated that the policy and all relevant documentation would have to be reviewed to determine if that interest may reasonably be considered to be acquired to fund retirement benefits Where an arrangement is deemed to be an RCA, the person or partnership who acquired the interest in the life insurance policy will be deemed to be the custodian of the plan and the interest in the policy will be property of the RCA. It should be noted that annuity contracts are included in the definition of a life insurance policy under the Act, the purchase of which can give rise to deemed RCA treatment (#2007-024465, APFF Conference Q 14). However, where an annuity is purchased in settlement of obligations under an existing RCA, the deemed RCA rules would not apply. The annuity purchase price would be viewed as a distribution out of the RCA and taxable to the employee. Similarly, Question 10 at the 2012 CALU CRA Roundtable (#2012-0435771C6) also confirmed that, a segregated fund policy is also defined as a life insurance policy under the Act and could be deemed to be the subject property of an RCA under subsection 207.6(2). 3

Since an RCA would exist whenever the definition in the Act is met, they may arise through inadvertence, but generally RCAs are set up by way of two separate agreements: an RCA Trust Agreement and an RCA (or Employee) Plan Agreement. The RCA Trust Agreement is between the employer and custodian (trustee) and sets out the powers, rights and obligations of the trustee. The RCA Plan Agreement is between the employer and employee and outlines the benefits the employee is entitled to and the conditions (if any) the employee must fulfill. The agreement may cover items such as employer contributions, vesting of benefits, quantum and timing of benefits, treatment at death and termination of the RCA. Care should be taken so that these documents not contain provisions that would allow for the beneficiary to be paid benefits otherwise than in the limited circumstances set out in subsection 248(1) of the Act. Some examples of benefits that CRA has questioned allow for discretionary payments to employees before a termination of employment or where there has been no substantial change in services rendered by the employee. A payment on a change in control of the employer even though the employee remains in the same employment capacity would be a problem. A change in control may well trigger a substantial change in services rendered but this may not necessarily be the case. The documentation should trigger RCA benefits on a change in services rendered rather than a change of control. Tax Treatment of RCAs An inter vivos trust is created when an RCA is established and there are specific rules relating to the taxation of RCA trusts. An RCA trust is exempt from Part I tax according to paragraph 149(1)(q.1) of the Act, but is subject to tax under Part XI.3 (sections 207.5 to 207.7) of the Act. Any contributions made to the RCA trust will be subject to a 50% refundable tax. Furthermore, any income earned within the RCA will also be subject to the 50% refundable tax. Capital gains and dividends do not retain their preferential tax treatment in an RCA. Capital gains are 100% taxable (rather than 50%) and there is no gross-up or tax credit for dividends. Contributions by the employer to the trust will be 100% deductible by the employer in the year the contributions are made and no taxable benefit will accrue to the employee. It should be noted that the CRA takes the view that contributions to an RCA by a parent company for years of service performed by the employee of a subsidiary company would not be considered a deductible amount to the parent company (#2007-0259851I7, dated January 10, 2008). Employees can contribute to the RCA trust if such contributions are required by the terms of employment and the amount contributed does not exceed employer contributions in the year in respect of that particular employee. Such contributions will be deductible by the employee under paragraph 8(1)(m.2) of the Act. The refundable tax will accumulate until such time as distributions are made from the RCA trust. The tax will be refunded on the basis of $1 for every $2 of benefits paid to a plan member or the employer. While the CRA maintains the refundable tax balance, no interest will be paid on the balance. Payments out of the plan (to either the employee or employer) will be included in the recipient s income in the year received. Payments from the plan may qualify as a retiring allowance and may, subject to prescribed limits, be transferred into an RRSP or RPP under paragraph 60(j.1) of the Act. Effective for the 2013 and subsequent taxation years, subsection 60.03(1) of the Act was amended to include amounts received out of an RCA, subject to certain conditions, in the definition of eligible pension for pension splitting. (See #2013-0497761E5 dated July 24, 2013 and #2013-050102 dated November 7, 2013). Where an arrangement which involves an employer owned life insurance policy is deemed to be an RCA, an amount equal to twice the premium payment will be treated as a contribution to the RCA. 4

Any payment received under the policy (including a policy loan) and any refund of refundable tax will be treated as a payment from the RCA. The employer will be deemed to be the custodian of the plan. Salary Deferral Arrangements (SDA) vs. RCA When establishing an RCA, one must consider the SDA rules. The SDA rules are another set of anti-avoidance rules that were introduced in 1986 and take priority over the RCA rules. The definition of an RCA excludes an SDA but the SDA definition provides no exclusion for RCAs. This means that if an arrangement which may have been set up as an RCA is in fact an SDA, it will be viewed as an SDA and not an RCA. An arrangement will be considered an SDA if: the taxpayer has a right at the end of the year to receive an amount after the year; it is reasonable to consider that one of the main purposes of the arrangement is to postpone tax payable by the taxpayer; and the tax that is postponed is in respect of salary for services rendered or an amount in lieu of salary. If an arrangement is considered an SDA rather than an RCA, then the employer contributions to the trustee will be taxable to the employee immediately, even though the employee does not receive the funds. The employer s contributions will continue to be deductible. If the arrangement is not replacing current earnings but rather, represents funding for retirement income, then the arrangement should be considered an RCA. The CRA has provided some commentary relating to the distinction between RCAs and SDAs. If a regular practice of bonusing down to the small business limit is replaced by contributions to an RCA for an owner-manager the CRA has confirmed that there may be some question as to whether the change in practice would result in an SDA being seen to exist (Question 2(b) 1998 CALU Tax Policy Roundtable, May 12, 1998). It was also CRA s view that generally, funded supplemental executive retirement pensions (SERPs) that provide benefits as if the prescribed maximums for RPPs did not exist would normally be viewed as RCAs and not SDAs (Question 2(c) 1998 CALU Tax Policy Roundtable, May 12, 1998). In technical interpretation #2002-0130701E5, dated August 23, 2004, the CRA stated: If the facts lead to a conclusion that the plan or arrangement was entered into with the intention of paying or allowing for the discretionary payment of benefits before a termination of employment, where there has been no substantial change in the services rendered by the employee, the plan or arrangement may not qualify as an RCA. In technical interpretation #2005-0132401I7, dated September 16, 2005 the CRA set out its thought process relating to RCA vs. SDA characterization as follows: It must also be ascertained that the plan in question is not, in fact, a SDA as defined in subsection 248(1) of the Act. As the definition of RCA specifically excludes SDA, the facts of any situation must support that none of the main purposes for the creation of the plan or existence of the right under the plan was to postpone tax payable under this Act by either party (our emphasis). As such, a review of the employee s prior years employment record and remuneration with the employer may be required to ensure consistency in earnings from one year to the next. A sudden decline in the amount of reumuneration paid to an employee suggests salary being rerouted through the particular plan to avoid tax and raises the question as to whether or not the plan is in fact a SDA and not a valid RCA. 5

Also, at the 2005 APFF Conference, Question 13, the CRA stated: The CRA has recently considered arrangements to fund benefits that are to be provided to employees under the provisions of plans that are identified as unregistered pension or supplemental pension plans. CRA has taken the position that these plans will generally be RCAs if the arrangements are pension plans and the benefits provided are reasonable. Where a plan provides benefits that are not reasonable, the CRA is of the view that a SDA will exist. The CRA is taking the view that benefits will not be reasonable if, for example, they are more generous than benefits that would be commensurate with the employee s position, salary and service or they do not take into account benefits that are provided through one or more registered plans. At the 2008 CALU Roundtable dated April 29, 2008 the CRA was asked to comment if the SERP plan terms must mirror the underlying RPP terms in designing a top-up arrangement for an executive. The CRA reiterated that in its view, if benefits are unreasonable the arrangement would be characterized as an SDA and not an RCA and stated that supplementary pension benefits will be considered to be reasonable if the terms are substantially the same as those of the RPP (but for the defined benefit or money purchase limits) that applies to the same beneficiaries to whom the SERP applies. The CRA continued as follows: 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. RCAs as Pensions Related and intermingled with commentary concerning the SDA vs. RCA distinction, another thread runs through the CRA commentary. This thread relates to the underlying theory that RCAs are viewed as pension plans (albeit unregistered ones) and if transactions are permitted in the documentation of the arrangement which would impair the ability of the RCA trust to fund a pension benefit or if the trustee is a mere agent of the company in making investment decisions, the arrangement may not, in fact, be viewed as a valid RCA. See technical interpretation #2003-0000797, dated February 6, 2003 in which these principles are enunciated and reference is made to a registered pension plan case, Kleysen s Cartage co. Ltd. V. MNR 71 DTC 344. In this letter the CRA stated: an RCA is intended to provide secure funding for benefits to be provided as a consequence of the retirement of an employee, the loss of office or employment of an employee or substantial change in the services provided by an employee. Accordingly, if an employer can use the funds to secure some other obligation, it raised the concern that the arrangement is not, in fact, a valid RCA. If it is determined that an arrangement is not an RCA, the proper taxation of the arrangement would have to be considered. This could include disallowance of the deduction of contributions made under the arrangement and the treatment of the trust as a taxable inter vivos trust possibly governed by an employee benefit plan or a salary deferral arrangement. RCA Funding Approaches There are various alternatives available to fund an RCA. Three alternatives are: funding with taxable investments, funding with life insurance and funding using letters of credit. Each of these alternatives is discussed briefly below. 6

Funding with Taxable Investments One method of funding an RCA is to use taxable investments to build a sinking fund capable of meeting future obligations. An employer contributes funds to an RCA trust and the net proceeds, after the 50% refundable tax is paid, are invested in taxable investments such as GICs, mutual or segregated funds, stocks, bonds or non-prescribed annuities. Refundable tax would be paid in respect of income or realized capital gains resulting from these investments. There is no preferential tax treatment on dividends or capital gains at the RCA trust level. This method of funding is not very attractive because the CRA receives 50% of all income earned in the RCA trust, in addition to the 50% refundable tax paid in respect of all contributions to the RCA. Since interest is not paid on the refundable tax balance held by the CRA, the ability of the RCA trust to significantly grow in value is hindered. However, where there are fewer years to retirement, these investments may be the most effective method of funding an RCA promise. Funding With Life Insurance When an RCA is funded with a life insurance policy, the policy is subject to the same taxation rules as if the policy was outside of an RCA. The funds accumulating in an exempt life insurance policy are not subject to the refundable tax. Therefore, the funds are allowed to grow tax-sheltered. Any policy gains on a full or partial disposition of the life insurance policy will be subject to the 50% refundable tax. Death benefits are received tax-free by the RCA trust, but subsequent distributions to the beneficiaries would be taxable in their hands. If the employer corporation is a beneficiary of the RCA, it would not be entitled to an increase in its capital dividend account (CDA) on distribution of the death benefit from the RCA trust. In order to pay the retirement benefits, the trustee of the RCA trust can use policy withdrawals or use the policy as collateral for a bank loan. As noted above, policy withdrawals may cause a tax liability for the trust, but a subsequent distribution out of the RCA trust will generate a refund of the tax. In most circumstances, withdrawals will provide higher levels of income than leveraging due to the fact that banks normally require a margin (i. e. only a certain percentage of the cash surrender value may be leveraged) which means that not all of the cash value is able to be accessed. A variation of the funding with life insurance method is to have the employer and RCA trust enter into a split-dollar arrangement whereby the corporation and the RCA trust apply for and co-own the life insurance policy. The split dollar agreement specifies the cost to each party and the benefit each party receives. Normally, the corporation pays for and is entitled to a level death benefit coverage, and the RCA trust pays for and is entitled to the balance (i.e. the cash value of the policy). The corporation will pay its share of the premium directly to the insurance company and pay twice the RCA s portion: one half to the RCA, allowing the RCA to pay for its share of the premium to the insurance company; and, the other half withheld and paid to the CRA, representing the 50% refundable tax on the contribution. Under such an arrangement, upon the death of the employee, the corporation and the RCA trust each receive their respective portion of the death benefit tax-free. The corporation, if eligible, will also receive an increase in its CDA equal to the excess of the proceeds received by the corporation over the adjusted cost basis of the policy to the corporation. When using split dollar insurance policies, it is important to ensure that each party pays a reasonable portion of the premium for the benefit received and that no party is impoverished. The reasonableness of the contribution to the RCA made by the employer and its related deduction thereof may be questioned to the extent that the RCA trust is bearing what should presumably be the cost to the employer of the death benefit portion of the policy. Alternatively, if the employer s portion of the cost of the policy is subsidizing the cost of the policy that should be borne by the RCA trust, the death benefit portion may be deemed to be the subject property of an RCA pursuant to subsection 207.6(2) of the Act. The CRA considered a split dollar life insurance policy involving an RCA in #9322475, dated September 16, 1993. The CRA stated: 7

the fact that the employer s share of the premiums under the policy would represent only the pure cost of term insurance would not of itself necessarily decide the issue. For example, if the employee s share of the premiums under the policy are less than would be required to fund similar retirement benefits under a policy where the employee paid all the premiums, it would seem reasonable to conclude that the employer s share of the premiums would be funding at least part of the retirement benefits. If so, the employer s interest in the policy would in our view be deemed to be the subject property of a retirement compensation arrangement (RCA) by reason of subsection 207.6(2) of the Income Tax Act. Also in relation to the advantage rules for RCA s, comments in the 2012 Federal Budget documents made a reference to arrangements (that) use insurance products to allocate costs to the arrangement for benefits that arise outside the arrangement. The Department of Finance has stated that this refers to split dollar arrangements where the RCA owns the cash surrender value of the policy and another party owns the death benefit where the death benefit owner is not properly funding the related mortality costs. Where this occurs in respect of an RCA with a specified beneficiary there could be an advantage to which the 100% special tax would apply. A note of caution when dealing with RCA s that have a significant beneficiary and thereby subject to the prohibited investment and advantage rules. In this context, the CRA made the following statement at the 2013 CLHIA CRA Roundtable (#2013-0481421C6, dated May 17, 2013): It is not clear under what circumstances an RCA would be holding a life insurance policy that provides for more than a nominal death benefit. The holding of such a life insurance policy would appear to have little to do with providing for benefits under the RCA in relation to retirement, a loss of an office or employment, or a substantial change in services rendered. The holding of such a life insurance policy by the RCA could give rise to an advantage, and therefore, advantage tax under section 207.62 of the Act. Perhaps the use of the split dollar concept may mitigate this potential problem. This brings one back to CRA commentary relating to what is the proper, reasonable cost to pay in respect of split dollar life insurance and whether there is any impoverishment. For more information on this issue and split dollar life insurance in general see the Tax Topics entitled Split Dollar Life Insurance and Split Dollar Life Insurance Applications. Funding With Letters of Credit A letter of credit (LOC) is another method of funding an RCA. A letter of credit is essentially a promise by the bank to pay an obligation of the employer, if the employer cannot. LOCs can normally be arranged at a cost of 0.25% to 2.5% of the principal amount, depending on the amount and creditworthiness of the applicant. Once the employer creates an RCA trust, the employer contributes funds sufficient to cover the cost of the trust obtaining the LOC (generally 2 times the fee charged by the bank). The RCA trust then uses the funds to arrange the LOC and remits the 50% refundable tax. The employer does not contribute the LOC to the RCA trust since the refundable tax will be based on the fair market value of the LOC. If the employer wanted to fund the RCA trust with $500,000, the employer would have to contribute $1,000,000 so that after the 50% refundable tax is paid, the RCA trust is left with the desired amount. However, if a LOC for $500,000 was obtained, the LOC fee at 1.5%, would be $7,500. Thus, the employer would only have to contribute $15,000 to the RCA trust as opposed to $1,000,000. Where the LOC is guaranteed by specific assets of the employer, the CRA may consider the value of such assets as a contribution, in addition to the fee for the LOC. However, if specific assets are not set aside for the RCA, and can be used for other purposes or to satisfy other creditors, they would likely not be considered separate contributions to the RCA. 8

Administering an RCA There are a number of administrative requirements that need to be considered before proceeding with an RCA. CRA has published a guide entitled Retirement Compensation Arrangements Guide which contains useful information explaining what forms are required, what the responsibilities of the employer and the custodian are and what penalties can be imposed if the requirements are not followed. In some cases, the penalties can be significant; therefore, it is important that these matters are properly researched before an RCA is created. Winding Up an RCA With continued decreases in corporate tax rates some owner-managed businesses may be looking to discontinue or wind-up an existing RCA set up in a prior year. The question of whether an RCA can be wound up is a legal question requiring a review of the RCA trust agreement and RCA Plan agreement in each case. Depending upon the terms of the trust and plan, winding up the RCA prior to retirement may or may not be possible. In technical interpretation #2004-006787 dated September 7, 2004, (confirmed by the CRA at the 2009 APFF Conference as generally representing its position) the CRA was asked to consider the early cessation of an RCA due to evolving factors and confirm if this could affect the arrangement s status as an RCA. The CRA responded as follows: Where a plan or arrangement is, in fact, established with a legitimate intent to fund retirement benefits, and a decision is subsequently made to terminate the plan or arrangement early, due to factors unforeseen at the outset (such as corporate takeover or unexpectedly high plan administration and funding expenses), in our view, the plan or arrangement should not generally cease to be an RCA due to the premature termination. It was also confirmed that where it is the case that the plan was an RCA up to and at the time of termination, all the normal tax rules relating to RCA treatment would apply. This would include the ability to receive a refundable tax refund under subsection 207.5(2) of the Act. This subsection applies where the only property an RCA holds at the end of the year consists of cash, debt obligations and shares listed on a designated stock exchange. The CRA confirmed (#2013-0493741E5) that where the property an RCA holds is an exempt life insurance policy that has a cash value and the underlying property of the exempt insurance policy consists of shares, bonds, mutual funds, etc., the election is not available. (Note, subsection 207.5(3) of the Act provides the use of this election may be limited after March 28, 2012 where the value of assets have declined to situations that are not reasonably attributable to a prohibited investment or an advantage or where the Minister deems it just and equitable.) Where it is possible, and life insurance funding is in place, the following are relevant considerations and tax consequences of winding up an RCA: the trustee may wish to transfer the life insurance policy to the RCA beneficiary. Where a life insurance policy is transferred, the trust would have a disposition of the policy. Section 107.2 of the Act provides that where property of an RCA trust is distributed to a beneficiary in satisfaction of all or any part of the beneficiary s interest in the trust, this disposition would occur at fair market value. A taxable policy gain may arise to the extent that the fair market value exceeds the adjusted cost basis of the policy. Any such income would be subject to refundable tax. However, a refund of refundable tax would also arise in respect of the distribution from the trust. On the distribution of the property to the RCA beneficiary, the beneficiary would have to include the fair market value of the policy distributed in income pursuant to paragraph 56(1)(x). This treatment was confirmed by the CRA in technical interpretations # 9532467 dated February 21, 1996, # 2000-0062057, dated January 9, 2001 and #2013-0481421C6 dated May 17, 2013. The fair market value of a life insurance policy is a question of fact. Such factors as: cash surrender value; policy loan value; face amount; the state of health of the life insured and his/her life expectancy; 9

conversion privileges; other terms, such as term riders, double indemnity provisions; and the replacement value of the policy have all been cited as potential bases of valuation of a life insurance policy. In this context it would be wise for the RCA trustee to seek the views of a valuation professional in determining the fair market value amount. Accounting for Retirement Compensation Arrangements For fiscal years beginning on or after January 1, 2011, publicly accountable enterprises are required to report using International Financial Reporting Standards (IFRS). Private enterprises are able to choose to adopt IFRS or, alternatively, they may use a new set of standards called Accounting Standards for Private Enterprises (ASPE). An RCA is a funded supplemental executive retirement plan (SERP) and, accordingly, may impact the corporate financial statements of the employer. Generally, a SERP is reflected in the financial statements using accounting standards applicable to pensions. Companies setting up an RCA will want to consider IAS 19 of the IFRS or section 3641 of the ASPE which deal with pension obligations and future employee benefits. Conclusion Despite increases in pension benefits and RRSP contribution limits, RCAs continue to be a popular method of supplementing executives retirement income. RCAs can be very effective vehicles to accomplish such goals, but proper planning and research should be undertaken to prevent adverse tax consequences. Last updated: April 2014 Tax, Retirement & Estate Planning Services at Manulife Financial writes various publications on an ongoing basis. This team of accountants, lawyers and insurance professionals provides specialized information about legal issues, accounting and life insurance and their link to complex tax and estate planning solutions. These publications are distributed on the understanding that Manulife Financial is not engaged in rendering legal, accounting or other professional advice. If legal or other expert assistance is required, the service of a competent professional should be sought. This information is for Advisor use only. It is not intended for clients. This document is protected by copyright. Reproduction is prohibited without Manulife's written permission. Manulife, Manulife Financial, the Manulife Financial For Your Future logo, the Block Design, the Four Cubes Design, and strong reliable trustworthy forwardthinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. 10