Canada: Employee Benefits And Executive Compensation: Draft Legislative Proposals Released

Last Updated: September 25 2012
Article by Jillian Welch

On August 14, 2012, the Department of Finance (Finance) released draft legislative proposals that implement tax measures announced in the March 29, 2012 federal budget. Explanatory notes were also released.

This Tax memo discusses the draft legislative proposals in respect of employee benefits and executive compensation. Specifically, it considers proposals that affect:

  • group sickness and accident insurance plans;
  • retirement compensation arrangements;
  • employee profit sharing plans; and
  • registered disability savings plans.


Before the budget, employer contributions to a group sickness and accident insurance plan did not have to be included in the income of an employee, and only periodic benefits paid under a "wage loss replacement plan" funded with employer contributions were taxable in the hands of an employee at the time of receipt. Other benefits paid under a group sickness and accident insurance plan, including lump sum benefits, generally were non-taxable benefits to an employee.

The changes

The draft proposals require the amount of an employer's contributions to a group sickness and accident insurance plan to be included in the income of the employee in the year in which contributions are made. However, as is currently the case, there will still be no income inclusion to the extent that the contributions are in respect of a wage loss replacement plan that provides periodic benefits

The explanatory notes indicate, for example, that this provision is intended to apply in respect of employer-funded premiums for critical illness or dismemberment insurance, which generally pay lump-sum benefits. Notwithstanding that the draft proposals will treat employer contributions to group sickness and accident insurance plans as taxable benefits, the benefits paid to employees under these plans will continue to be treated as non-taxable receipts.

As well, this proposal will not affect the tax-free status of premiums and benefits under private health services plans, such medical and dental plans.

This provision will apply to all employer contributions made after March 28, 2012. However a transitional rule will defer, until the 2013 taxation year, the income inclusion for employer contributions made between March 28, 2012, and before 2013, in respect of coverage for 2012.


In very general terms, a retirement compensation arrangement (RCA) is defined by the Income Tax Act (the Act) as an employer-sponsored pension or retirement savings arrangement, other than a registered pension plan, registered retirement savings plan (RRSP), deferred profit sharing plan, employee profit sharing plan, group sickness and accident insurance plan or an employee trust, among other specific exclusions.

Generally, employers and employees are entitled to a deduction from income in respect of contributions they make to an RCA. Plan members are not taxed on employer contributions made to the RCA. Instead, an RCA is liable to tax at the rate of 50% on the contributions it receives and on the net income and net capital gains it earns (referred to as the "refundable tax account").

Plan members must include distributions from an RCA (typically as retirement benefits) in income at the time of receipt. In turn, distributions the RCA pays to its plan members will also generate a refund of tax to the RCA, from its refundable tax account, equal to 50% of the amount of the distributions made in the year.

A specific provision permits an RCA to file an election to trigger a refund of tax to the RCA when the value of its property has declined such that it is insufficient to fund the distributions made by the RCA to plan members necessary to generate a refund of tax paid by the RCA.

The changes

The budget announced that measures would be introduced to curtail certain problematic arrangements involving the use of RCAs. These include the triggering of employer deductions for large contributions that are indirectly returned to the employer through a series of loans and/or corporate asset strips that leave an RCA with insufficient assets to support distributions to plan members. In these circumstances, typically an election is filed by the RCA to trigger a refund of tax, on the basis that the asset value of the RCA has been impaired.

The draft proposals, generally effective after March 28, 2012 (with limited grandfathering), intend to restrict RCAs by:

  • extending the "prohibited investment" and "advantage" rules that currently apply to RRSPs, registered retirement income funds (RRIFs) and tax-free savings accounts (TFSAs) to RCAs; and
  • introducing restrictions on the ability of an RCA to file an election to obtain a refund of tax.

Tax on prohibited investments

The draft proposals levy a tax on the custodian of an RCA if:

  • the RCA acquires a prohibited investment after March 28, 2012; or
  • property of the RCA becomes a prohibited investment after March 29, 2012.

The tax is equal to 50% of the fair market value of the prohibited investment.

The draft proposals define a prohibited investment to have the same meaning as in the context of the TFSA, RRSP and RRIF rules, with a minor modification that replaces the reference to a "controlling individual" with a "specified beneficiary" of an RCA. A "specified beneficiary" is a person who:

  • has an interest or a right in relation to an RCA; And
  • has or had a "significant interest" in the employer in respect of the RCA.

As drafted, it appears that the phrase "had a significant interest in the employer" could apply, for example, to treat a plan member who acquires and divests of a significant interest over a brief period (e.g., upon the exercise of stock options immediately followed by a disposition of underlying shares) as a specified beneficiary and would continue to do so at all subsequent times.

Whether the definition of a specified beneficiary is intended to have such broad scope is not clear. The definition allows an RCA to have more than one specified beneficiary.

As proposed, a prohibited investment for an RCA generally includes a debt of a specified beneficiary or a share of, an interest in or a debt of, a person, trust or partnership in which the specified beneficiary has a significant interest, does not deal at arm's length or is affiliated with the specified beneficiary.

Of note, the draft proposals define the term significant interest to have the same meaning as provided by the TFSA rules. Finance released a comfort letter on June 13, 2012, that recommends narrowing the circumstances in which a holder of a TFSA (or annuitant of an RRSP or RRIF) will be considered to have a significant interest.

One recommendation in the comfort letter is to amend the definition of prohibited investment so that it generally will have the effect of preventing an investment from being a prohibited investment when an RRSP/RRIF annuitant (or a TFSA account holder) both lack a significant interest in the entity in question and deals at arm's length with the entity. The definition of prohibited investment in the draft proposals already reflects this comfort letter recommendation.

Similar to the existing rules in the TFSA context, the draft proposals provide for a refund of the tax that is imposed on a prohibited investment, if the custodian of the RCA disposes of the prohibited investment before the end of the calendar year following the calendar year in which the tax arose, provided that the prohibited investment was not knowingly acquired by the custodian or specified beneficiary as a prohibited investment. The Minister of National Revenue (the Minister) is also provided with discretion to refund the tax later if the Minister considers it reasonable in the circumstances.

A special rule provides that if a property held by an RCA trust ceases to be, or becomes, a prohibited investment of an RCA trust, the trust is deemed to have:

  • disposed of the property for proceeds equal to the fair market value of the property at that time; and
  • acquired the property at that time at a cost equal to that fair market value.

This rule is designed to assist in determining the advantage tax in relation to income and gains on prohibited investments. The triggering of income and gains on prohibited investments could also affect the RCA's refundable tax account.

Grandfathering for prohibited investments

The prohibited investment rules in respect of RCAs generally apply after March 28, 2012, with limited grandfathering,

The explanatory notes clarify that if a significant interest in a corporation, such as a debt of the corporation controlled by a specified beneficiary of an RCA, is already held by the RCA before March 29, 2012, it will not be subject to the 50% tax.

In addition, an amendment to the terms of a promissory note, or similar debt obligation, that is property of the RCA acquired before March 29, 2012, to provide for commercially reasonable payments of principal and interest is deemed not to be a disposition or acquisition of that note or obligation.

Tax on advantages

The draft proposals also levy a tax on the custodian of an RCA if an advantage in relation to the RCA is extended to or is received or receivable by an RCA, a specified beneficiary or any person not dealing at arm's length with the specified beneficiary. The tax is generally equal to the fair market value of the advantage.

The draft proposals define an advantage to closely follow the meaning given to this term in the context of the TFSA, RRSP and RRIF rules, with minor modifications to reflect certain attributes of an RCA. The proposed definition of advantage includes:

  1. Any benefit, loan or indebtedness that is conditional on the existence of the arrangement, unless the loan or indebtedness has "arm's length" terms and conditions.
  2. An increase in the fair market value of the property under the arrangement if the increase is attributable to a transaction or event (or series) when one of the main purposes was to enable a person or partnership to realize certain tax benefits, if this transaction would not have occurred in a normal commercial or investment context between parties dealing at arm's length, or includes a payment that was in satisfaction of certain amounts that would otherwise have been income to the specified beneficiary or a person not dealing at arm's length with the specified beneficiary.
  3. Income and capital gains that are reasonably attributable to prohibited investments in respect of the RCA1 or certain amounts received by a specified beneficiary or a person not dealing at arm's length with the specified beneficiary that would not otherwise have been income to the recipient.
  4. The amount of any "RCA strip." The draft proposals define an RCA strip to closely follow the definition of an RRSP strip in subsection 207.01(1) of the Act. An RCA strip is intended to target transactions or a series of transactions that reduce the fair market value of property of an RCA when one of the main purposes is to enable a specified beneficiary or a person not dealing at arm's length with the specified beneficiary to use or obtain the benefit of the property or from any of the RCA rules, in respect of which there has been no income inclusion.

    The explanatory notes provide as an example of an RCA strip, a loan made by an RCA to a specified beneficiary, or a debt of a specified beneficiary acquired by an RCA, when steps are taken to ensure that the loan cannot be repaid. The explanatory notes also state that the RCA strip rules can apply to a debt acquired by an RCA before March 29, 2012, if the value of the debt is impaired after March 28, 2012 as part of a series of transactions that meets the test set out in the definition.
  5. A prescribed benefit.2

Grandfathering for advantage rules

The advantages rules in respect of RCAs in the draft proposals apply after March 28, 2012, with limited grandfathering.

Transactions or events relating to property of an RCA acquired before March 29, 2012 will not give rise to an advantage if either:

  • the amount that would otherwise be an advantage is included in the income of a beneficiary, or employer in respect of the RCA, for the taxation year in which the advantage arose or the following taxation year; or
  • the property is a promissory note or similar debt obligation, commercially reasonable payments of principal and interest are made at least annually after 2012 and no RCA strip occurs after March 28, 2012.

In respect of this latter condition, amendments to the terms of a promissory note or debt obligation to provide for commercially reasonable payments of principal or interest will be deemed to not give rise to a disposition of the note or obligation.

Liability for taxes

One noteworthy difference between the existing prohibited investment and advantage rules that apply in the TFSA, RRSP and RRIF context and those in the draft proposals is that the latter create joint and several liability for the tax. A specified beneficiary of an RCA is jointly and severally liable for the tax that is levied on a custodian in respect of prohibited investments and advantages, to the extent that the specified beneficiary "participated in, assented to or acquiesced in the making of," the transaction, event or series of transactions or events that resulted in the liability. It is unclear why Finance considered this extension of liability to a specified beneficiary to be necessary.

The draft proposals give the Minister discretion to waive or cancel all or part of the taxes levied in respect of prohibited investments or advantages, when the Minister considers it just and equitable to do so, including when the tax arose as a consequence of a reasonable error or gave rise to tax under another provision of the Act.

The draft proposals also provide that when a custodian of an RCA, but not a specified beneficiary, has paid tax under the above provisions, the amount of tax paid (and not otherwise cancelled or waived) will be deemed to be a distribution made by the RCA to plan members for the purpose of computing the RCA's refundable tax. However, these "deemed distributions" will not be taxable to the beneficiaries of the RCA trust.

Restriction on the election for impaired Assets

The draft proposals limit the ability of an RCA to claim a refund of tax by restricting the ability of an RCA to file an election in respect of asset value impairment. This restriction is imposed when the decline in asset value is reasonably attributable to a prohibited investment for, or an advantage in relation to the RCA, unless the Minister determines it is just and equitable to allow the election, having regard to all of the circumstances.

The restriction applies to elections filed in respect of contributions to RCAs made after March 28, 2012, and income and capital gains realized in respect of these contributions.


The draft proposals implement measures announced in the budget to ensure that employee profit sharing plans (EPSPs) are being used for their intended purposes and to discourage excessive employer contributions for certain plan members.

New Part XI.4 imposes a special tax on a "specified employee" in respect of contributions to an EPSP that are an "excess EPSP amount." The term excess EPSP amount is defined to generally mean contributions that are in excess of 20% of the specified employee's income from office or employment, computed without reference to amounts allocated to the employee under an EPSP, stock options and certain deductions in respect of employment income.

The term specified employee is defined to generally mean an employee who owns, directly or indirectly, at least 10% of the shares of the employer corporation or an employee who does not deal at arm's length with the employer. The special tax imposed on an excess EPSP amount is generally equal to the top marginal combined federal and provincial/territorial rate applicable to the specified employee in his or her province or territory of residence (including provincial/territorial surtaxes but not taxes that are limited to a maximum amount).3

The draft proposals allow the Minister to waive or cancel all or part of the Part XI.4 tax when it may be just and equitable to do so. Information returns are also required to be filed in respect of a taxpayer's liability for taxes under new Part XI.4. Generally, a person liable for this tax must file a return on or before the person's tax return filing date for the year, estimate in the return the amount of tax payable by that person and remit the amount of tax payable under Part XI.4.

A taxpayer will be permitted to deduct from employment income an amount equal to the excess EPSP amount, in respect of which the taxpayer is liable for Part XI.4 tax (that was not otherwise waived or cancelled). This deduction ensures that the excess EPSP amount is not subject to double taxation.

These draft tax measures apply in respect of the 2012 and subsequent tax years, but do not apply in respect of contributions made to an EPSP before March 29, 2012, or pursuant to an obligation arising before this date.


The draft proposals implement the measures announced in the budget to improve the attractiveness of registered disability savings plans (RDSPs). One improvement allows the subscriber of a registered education savings plan (RESP) and a holder of an RDSP, in respect of the same beneficiary, to elect to transfer accumulated income payments from a RESP on a tax-deferred basis, to the RDSP. Several consequential amendments to the RESP and RDSP rules are proposed to accommodate this rollover.

Very generally, the draft proposals also introduce other rules to implement maximum and minimum withdrawal rules, terminate an RDSP following the cessation of eligibility for the disability tax credit, and facilitate certain administrative and filing requirements in respect of RDSPs.


1. It is therefore possible for the custodian of the RCA trust to be liable for a 50% tax on the acquisition of the prohibited investment as well as a 100% tax on any advantage arising from the prohibited investment.

2. The advantage rules in the RRSP, RRIF and TFSA context do not yet have any prescribed benefits. Presumably, this definition is intended to provide Finance the ability to expand the definition of advantage by regulation, as opposed to legislative amendments, should specific circumstances require it.

3. If the specified employee is a resident of Quebec, the provincial rate is set at nil. Presumably, Quebec will enact similar provisions to impose its own rate of provincial tax. If the specified employee is not resident in a province or territory in the year an excess EPSP amount is determined (for example, a non-resident), the effective tax rate is set at 43%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.