ARCHIVED – Budget 2012 - Retirement compensation arrangements (RCAs)

1. What is the new tax on RCA advantages?
2. What is an advantage in respect of an RCA?
3. Who is a specified beneficiary of an RCA?
4. Are there any exceptions to these new anti-avoidance rules for advantages?
5. What is the new tax on RCA prohibited investments?
6. Are there any exceptions to the new rules for prohibited investments?
7. Other than the custodian of the RCA, are any others liable to the new tax on advantages or the new tax on prohibited investments?
8. Do these new rules change the election that can be made by the custodian of an RCA when there has been a decline in value of the property held under the RCA?
9. What should I do if I participated in an inappropriate transaction involving my RCA?
10. Where can I obtain more information on the new RCA anti-avoidance rules?

The budget proposes to introduce new anti-avoidance rules to prevent the use of schemes that seek to take advantage of the features of the RCA rules to obtain unintended tax benefits. These rules will be similar to the existing rules for registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax free savings accounts (TFSAs). These new rules include the following:

• The custodian of an RCA will be liable to a tax on advantages;
• The custodian of an RCA will be liable to a tax on prohibited investments;
• Certain beneficiaries will also be liable to these new taxes; and
• RCA tax refunds based on the decline in value of RCA property will be restricted.

Q1. What is the new tax on RCA advantages?

A1. For advantages extended, received or receivable after March 28, 2012, the budget proposes that a custodian of an RCA pay a tax equal to the fair market value of an advantage obtained by a specified beneficiary of an RCA, or a person who does not deal at arm's length with the specified beneficiary.

The Minister will have the power to waive or cancel the tax where the Minister is satisfied that it is just and equitable to do so, having regard to all the circumstances.

Q2. What is an advantage in respect of an RCA?

A2. An advantage may generally be described as a benefit obtained from a transaction that is intended to unduly exploit the tax attributes of an RCA, including the reduction in value of the RCA. An advantage will include benefits attributable to prohibited investments, swap transactions and RCA strips (similar to the existing advantage rules).

Q3. Who is a specified beneficiary of an RCA?

A3. A specified beneficiary refers to an individual who has an interest or right in respect of an RCA and who has a significant interest in an employer in respect of the arrangement. A significant interest will be defined in a similar manner to the existing advantage rules.

Q4. Are there any exceptions to these new anti-avoidance rules for advantages?

A4. This measure excludes an advantage that relates to property acquired, or transactions occurring before March 29, 2012, if:

• the advantage is obtained by a specified beneficiary of the RCA (or a person who does not deal at arm's length with the specified beneficiary) and the amount of the advantage is included in computing the income of the specified beneficiary; or,
• if the advantage is obtained by an RCA and the amount of the advantage is distributed from the arrangement and included in computing the income of a beneficiary or an employer in respect of the arrangement.

Q5. What is the new tax on RCA prohibited investments?

A5. For investments acquired, or that become prohibited investments, after March 28, 2012, the budget proposes that the custodian of an RCA pay a 50% tax on the fair market value of any prohibited investment acquired or held by the RCA.

The Minister will have the power to waive or cancel the tax where the Minister is satisfied that it is just and equitable to do so, having regard to all the circumstances.

Q6. Are there any exceptions to the new rules for prohibited investments?

A6. The tax on prohibited investments will be refundable if the RCA disposes of the prohibited investment by the end of the year following the year in which it was acquired (or such later time as the Minister considers reasonable) unless any of the persons liable for the tax knew or ought to have known that the investment was a prohibited investment.

Q7. Other than the custodian of the RCA, are any others liable to the new tax on advantages or the new tax on prohibited investments?

A7. Effective after March 28, 2012, the budget proposes that a specified beneficiary of an RCA that participates in acquiring or holding a prohibited investment, or in extending an advantage, in respect of the RCA, will be jointly liable, to the extent of their participation, for the tax in respect of the prohibited investment or the tax in respect of the advantage.

Q8. Do these new rules change the election that can be made by the custodian of an RCA when there has been a decline in value of the property held under the RCA?

A8. For the refundable tax on contributions made to an RCA after March 28, 2012, the budget proposes that the election is available only in circumstances where a decline in value of property held under RCA is not reasonably attributable to a prohibited investment or an advantage, unless the Minister is satisfied that it is just and equitable to accept the election having regard to all the circumstances (including the extent to which tax has been paid under another provision of the Act).

Q9. What should I do if I participated in an inappropriate transaction involving my RCA?

A9. You can correct previous omissions or errors through the CRA's Voluntary Disclosures Program. If you make a full disclosure before any compliance enforcement action is started, you may only have to pay the taxes owing plus interest. Go to the Voluntary Disclosures Program for more information.

Q10. Where can I obtain more information on the new RCA anti-avoidance rules?

A10. The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2012 documents for details.