1. Retirement Compensation Arrangements (RCA)

2. 2 What is a Retirement Compensation Arrangement (RCA) The definition of a RCA is taken from the Canada Revenue Agency (CRA) Retirement Compensation Arrangement Guide 2005. An RCA is a plan or an arrangement 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). Distribution may occur on, after, or in view of: –An employee’s retirement –An employee’s loss of an office or employment; or –Any substantial change in the services the employee provides (e.g. an athlete retained as a scout after the end of a professional playing career).

3. 3 Retirement Compensation Arrangement (RCA) An RCA allows an employer to make tax-deductible contributions to the custodian of a trust, to fund benefits that an employee will eventually receive when there is a substantial change in the employee’s employment situation (such as retirement). The custodian then invests these contributions into any number of possible investments.

4. 4 Retirement Compensation Arrangement (RCA) Who qualifies for an RCA An employee who is making an income of $125,000 plus. RCA’s are effective for business owners and executives from the ages of 35 – 50. Are looking to replace the bonus down strategy. May be a non-resident of Canada upon retirement (e.g. professional athlete). Are looking for creditor protection on corporate assets. Wish to reward key employees over and above traditional retirement planning methods. Are experiencing strong growth and are looking to replace the shareholder loan with a leveraged RCA.

5. 5 Refundable Tax The contributions made by the employer to the custodian are taxable under Part XI.3 of the Income Tax Act (the Act). The tax is equal to 50% of the amount of the contributions. The employer sends this tax to CRA for the RCA trust. The tax is refundable and CRA returns it to the custodian when distributions are made out of the RCA trust to the beneficiary. Income from business or property, or a capital gain earned in the RCA trust, is also taxable under Part XI.3 of the Act at 50% of the amount of income. The custodian sends the tax to CRA, a refund is distributed to the beneficiary. Retirement Compensation Arrangement (RCA)

6. 6 Refundable Tax cont’ The custodian files a T3-RCA tax return each year, even if there has been no activity in the RCA trust. When filing the tax return, the custodian ensures that the correct amount of refundable tax has been sent to CRA or has been refunded to the RCA trust. Retirement Compensation Arrangement (RCA)

7. 7 Employee/Participant 100% Tax Deductible Contributions RCA Investment RTA Refundable Tax Account RCA Trust Employee-Taxable Benefits A $400,000 contribution by the Employer. $200,000 go to the RCA and $200,000 to the RTA $200,000 Tax Deductible to Employer $200,000 Tax Deductible to Employer As money is withdrawn from the investment, money from the RTA is refunded to the RCA trust. The ratio is $1 from the RTA for every $2 received in taxable income. Money is withdrawn to pay the benefits to the employee

8. 8 Retirement Compensation Arrangement (RCA) Distributions All distributions out of the RCA trust to a beneficiary are taxable. The custodian has to provide the beneficiary with a T4A-RCA slip, statement of Distributions From a Retirement Compensation Arrangement (RCA), showing the amount of distributions and of the income tax deducted. The beneficiary reports the amount distributed and claims the income tax deducted on his or her income tax and benefit return for the year it is received.

9. 9 Retirement Compensation Arrangement (RCA) Excluded Arrangements Certain arrangements (such as registered pension plans, deferred profit-sharing plans, salary deferral arrangements, and employee trusts) do not qualify as RCAs.

10. 10 Retirement Compensation Arrangement (RCA) What are the advantages of an RCA Corporately funded private pension plan paid for with tax deductible dollars. Enhances retirement income. Allows for the catch-up of lost RRSP contribution room Provides a disciplined approach to funding an adequate retirement income. Assets are held in trust and may be protected from corporation’s creditors.

11. 11 Retirement Compensation Arrangement (RCA) How to set up an RCA 1.The employer sets up the Trust. Three individuals are selected. (individuals can not be a Director or Officer, also the individual can not be related to the Director or Officer or an employee that acts as Trustee of the Plan). The Trustee of the Plan could be a trust company or other financial institution. 2.The employer establishes an RCA Trust Indenture and an RCA Plan Text. 3.A Director’s Resolution establishing the plan must be passed. 4.Trustee enter into an arrangement with financial institutions to invest the assets of the plan. 5.The Trustee establishes a bank account for the RCA. 6.The employer arranges for both the Trust Indenture and Plan Text to be registered with CRA.

12. 12 Retirement Compensation Arrangement (RCA) What is a Trust Indenture? A Trust Agreement between the company establishing the RCA on behalf of the employees and the appointed Trustees of the RCA. Trust Indenture guidelines: Payment from the Trust Investment of Trust Fund Powers of Trustees Accounts and Records Responsibilities and Limitations Trustees Compensation Resignation, Removal, Replacement of Trustees Note: Trust Agreement must be signed by a representative of the company who has authority to bind the company, and by each of the trustees identified in the Trust Agreement. Each signature must have a corresponding Witness.

13. 13 Retirement Compensation Arrangement (RCA) What is an RCA Plan Text? It’s a plan that is set up for the participants of the RCA and the employee plan. RCA Plan Text guidelines: Construction of the plan Eligibility and Enrolment Contributions Benefit Options on Termination of Employment Plan Benefits Benefits on Death Funding and Administration of the Plan

14. 14 Retirement Compensation Arrangement (RCA) Funding an RCA Using Universal Life (UL) There are a number of investments that can be held within an RCA including property, stocks, bonds etc. Each year 50% of all interest income, dividend income and realized capital gains earned in the RCA must be remitted to the CRA to comprise part of the RTA. A tax deferred UL policy is an attractive investment, the interest earned each year is not taxable until funds are removed from the plan. Therefore, no remittance to the CRA on the interest component is required. When using life insurance, the RCA Trust purchases a UL policy on the life of the employee and over funds the policy. The over funding component builds the Cash Value of the plan, the Cash Value will be used to provide the benefits to the employee at retirement. Note: When using a Universal Life (UL) insurance policy as the investment vehicle within an RCA it is imperative that the RCA be existence prior to purchasing the UL.

15. 15 Retirement Compensation Arrangement (RCA) Leveraged RCA The leveraged RCA plan offers the opportunity for a corporation to make tax-deductible contributions to an RCA while borrowing back a large portion of the contribution.

16. 16 Retirement Compensation Arrangement (RCA) How a leveraged RCA works 1.The corporation makes a tax-deductible contribution to the RCA Trust to fund the eventual retirement benefits of an employee. 2.The Trust remits 50% of the contributions directly to the CRA and purchases a UL insurance policy with the other 50%. 3.The Trust arranges, with a financial institution, to secure a loan using the total value of the RTA and the Cash Value of the policy as collateral. 4.The financial institution lends the Trust up to 90% of the total value of the RTA and the Cash Value of the policy. 5.The RCA Trust lends the money to the corporation.. Note: There will be significant expenses incurred in setting up a leveraged RCA so this concept should not be considered unless the contribution is significant. Generally the lending agreement will require that the loan be paid off prior to paying out retirement benefits from the Trust.

17. 17 Retirement Compensation Arrangement (RCA) Death Benefit Another advantage for using a UL insurance policy for funding an RCA is that the insurance coverage provides Estate Protection through the Death Benefit. There is a provision for the beneficiaries of the employee to receive the assets held in the RCA when the employee dies prior to distributing all the assets as retirement income. The death benefit of the policy is paid tax free to the RCA, the owner of the insurance policy. The proceeds are taxable when they find their way to the employee’s beneficiaries as they no longer considered proceeds from an insurance policy but merely a distribution of assets from an RCA.

18. 18 Retirement Compensation Arrangement (RCA) On Death of an employee: Death Benefit Trust Employee’s Beneficiaries The Death Benefit flows tax- free to the owner (the Trust), as the payout is insurance proceeds When the undistributed funds in the Trust (including the Death Benefit) are distributed to the beneficiaries they are 100% taxable as they have lost their insurance proceeds standing.

19. 19 Retirement Compensation Arrangement (RCA) Split Dollar RCA To combat this taxable event of a Death Benefit payout, Split Dollar RCAs have become more and more common as they offer more flexibility. The structure of a Split Dollar RCA is the ownership of a UL policy is usually split between the RCA Trust and the employee/corporation. The employee/corporation normally owns the face amount and pays for the mortality charges of the coverage. The RCA owns the cash value.

20. 20 Retirement Compensation Arrangement (RCA) Split Dollar RCA cont’ The parties involved enter into an agreement and each is responsible for paying a portion of the premium. With a Split Dollar RCA arrangement the insurance component is held outside the RCA. The RCA Trust owns the cash value and is responsible for paying the over funding component in the UL. The Cash Value is used as the funding structure for the retirement benefit payable to the employee/corporation.

21. 21 Retirement Compensation Arrangement (RCA) There are two advantages to a Split Dollar RCA 1.As mentioned the face amount is owned by the employee/corporation and is held outside the RCA, on the death of the insured the death benefit does not flow through the RCA but directly to the beneficiary. Tax implications are removed when the death benefit flows first to the RCA and then to the employee/corporation’s beneficiary. 2.The benefit of funding the insurance component by the employee/corporation instead of the RCA, where it’s typically held outside the RCA, there is no RTA remittance required on the portion of the deposit to pay the mortality charge.

22. 22 Retirement Compensation Arrangement (RCA) Split Dollar Agreement RCA Trust Employee/Corporati on Cash Value Insurance Coverage Insurance Policy Responsible for paying the portion of the premium and over funding the cash value. Responsible for paying the mortality costs. For more information on Split Dollar go to AdvisorNet>insurance>Sales Tools>Corporate Concepts>Split Dollar Arrangements

23. 23 Conclusion RRSPs and Pension Plans provide an excellent source of income in retirement and are a necessity for every Canadian planning for retirement. However, there are limitations. General guidelines suggest that we should retire on roughly 70% of our pre-retirement income. For many high-income earners and business owners, the current restrictions on RRSP contributions limit the amount they can invest in a tax-deferred program and the current Pension ceiling limits the amount they can draw from a Deferred Benefit Pension Plan in retirement. Basically, the more money you earn, the harder it is to save for retirement on the full 70% of your pre-retirement income.

24. 24 Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as insurance representatives of RBC DS Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors or RBC DS Financial Services Inc. RBC DS Financial Services Inc. is licensed as financial services firm in the province of Quebec. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member CIPF. ®Registered Trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. ©Copyright 2006. All rights reserved. Retirement Compensation Arrangements are complex and need to be discussed with your Regional Insurance Specialist to find out which method is better suited for your client(s). For more information on Retirement Compensation Arrangements or any other corporate concepts please contact your Regional Insurance Specialists. Thank you