Regulations Amending the Income Tax Regulations (Prescribed Arrangement — Air Canada): SOR/2025-75
Canada Gazette, Part II, Volume 159, Number 7
Registration
SOR/2025-75 March 6, 2025
INCOME TAX ACT
P.C. 2025-278 March 5, 2025
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Income Tax Regulations (Prescribed Arrangement — Air Canada) under section 221footnote a of the Income Tax Act footnote b.
Regulations Amending the Income Tax Regulations (Prescribed Arrangement — Air Canada)
Amendment
1 Subparagraph 6802(h)(i) of the Income Tax Regulations footnote 1 is replaced by the following:
- (i) to hold shares of Air Canada, pursuant to the June 2009 memorandum of understanding and the April 2022 letter of intent between Air Canada and certain trade unions who represent employees of Air Canada, if
- (A) the shares are held by the trust for the benefit of the trade unions,
- (B) amounts received or receivable by the trust in respect of the shares, whether as dividends, proceeds of disposition or otherwise, are not to be distributed unless
- (I) each of the trade unions directs the trustee to contribute, from time to time, the amounts to one or more registered pension plans under which Air Canada is a participating employer, or
- (II) the amounts are paid to recipients in the manner contemplated in the April 2022 letter of intent between Air Canada and certain trade unions who represent employees of Air Canada, and
- (C) all of the property of the trust is distributed no later than December 31, 2037, or
Coming into force
2 Section 1 is deemed to have come into force on January 1, 2024.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Issues
In 2009, Air Canada requested an exemption from the retirement compensation arrangement (RCA) rules under the Income Tax Act (the Act). A tax accommodation was provided via an amendment to section 6802 of the Income Tax Regulations (the Regulations), which explicitly referred to a 2009 Memorandum of Understanding (the 2009 MOU) between Air Canada and the unions representing its employees. At that time, the amendment to section 6802 of the Regulations allowed a special-purpose trust of Air Canada to be excluded from the RCA rules under the Act.
The parties have since entered into a new agreement, that being the 2022 Letter of Intent (the 2022 LOI), which reflects different terms than those reflected in the 2009 MOU. Accordingly, the tax accommodation in paragraph 6802(h) of the Regulations requires an amendment to reflect the updated agreement between the parties.
Background
An RCA is defined under subsection 248(1) of the Act, and it is a type of employer-sponsored arrangement that generally allows an employer to provide pension benefits to employees that are supplemental to benefits payable from registered pension plans. RCAs are subject to a refundable tax of 50% of contributions to the RCA trust as well as 50% of the gains and income earned or realized by the trust. The 50% refundable tax is generally intended to prevent RCAs from being used to circumvent the tax-assisted contribution limits imposed on registered pension plans and registered retirement savings plans. As such, the tax is generally refunded as retirement benefits are paid from the trust to the employee(s).
The RCA rules are generally intended to prevent tax deferral in relation to employee retirement savings beyond the registered pension plan and registered retirement savings plan limits. However, under the Act, a plan or arrangement that meets the definition of an RCA may be excluded from the refundable tax of 50% if it meets one of the exceptions set out in the Act. One of the exceptions, pursuant to paragraph 248(1)(n) of the definition of an RCA, is that the plan or arrangement is a “prescribed plan or arrangement”. To be a “prescribed plan or arrangement”, the plan or arrangement must be listed as such under section 6802 of the Regulations. In the case of Air Canada, it was listed under section 6802 on the condition that the special-purpose trust would exist solely to fund Air Canada’s pension plans.
In 2009, the viability of Air Canada was in doubt, which could have led to the termination of their underfunded pension plans and a reduction of pension plan benefits to its members. To address pension underfunding, Air Canada entered the 2009 MOU with the collective bargaining agents of its employees (i.e. the five unions representing Air Canada employees) to establish a trust to hold 17 million common shares of Air Canada for beneficiaries. The 2009 MOU directed the unions that any proceeds from the sale of all or a portion of the shares were to be used for the sole purpose of funding solvency deficits of Air Canada’s pension plans.
In 2009, Air Canada and the unions requested amendments to the Regulations to ensure that the trust would not be an RCA under the Act and not subject to the 50% refundable tax. The Regulations were amended to add the Air Canada trust to the list of arrangements that are a “prescribed plan or arrangement,” thus exempting the Air Canada special-purpose trust from the definition of an RCA, and from the imposition of the 50% refundable tax. Without these amendments, the value of the shares contributed to the trust would have been a contribution to an RCA and subject to the 50% refundable tax.
Air Canada’s pension plans are currently fully funded. Therefore, in the short term, the special-purpose trust will not make contributions to its pension plans. In 2022, Air Canada and the unions entered the 2022 LOI, under which they agreed to amend the trust agreement to permit a broader use of the proceeds of disposition of the shares held by the special-purpose trust. The 2022 LOI proposes to amend the special-purpose trust such that the proceeds from the sale of the shares will be used for the following purposes:
- Provide lump-sum payments outside of the pension plan to partially compensate retirees for not having received cost-of-living adjustments to their pensions over the past 10 or more years; and
- Provide severance packages to employees opting to retire early.
The Canada Revenue Agency’s (CRA) interpretation of the Act and Regulations is that the amended special-purpose trust pursuant to the 2022 LOI would become an RCA, and accordingly subject to the 50% refundable tax. An amendment to the Regulations is required to reflect the terms of the 2022 LOI.
Objective
The objective is to ensure that, following the 2022 LOI, the Air Canada special-purpose trust continues to be exempt from the application of the RCA rules and its refundable tax requirements. This is necessary to preserve the tax accommodation initially granted to Air Canada in 2009 (i.e., an exemption from the 50% refundable tax applicable to RCAs), and to ensure the Regulations accurately reflect the 2022 agreement between Air Canada and its unions.
The tax accommodation initially granted to Air Canada in 2009 should be preserved so that at all times (since inception in 2009 to its termination in 2037) the special-purpose trust is exempt from the application of the RCA rules. The policy rationale underlying the taxation of RCAs is not intended to apply to the types of benefits contemplated in the 2009 MOU or 2022 LOI entered by Air Canada and the unions.
Description
An amendment to the Regulations is required to continue to exempt a special-purpose trust established in 2009 by Air Canada from being an RCA under the Act.
The Regulations Amending the Income Tax Regulations (Prescribed Arrangement — Air Canada) (the Amendment) ensures that for the purposes of the definition of an RCA, a “prescribed plan or arrangement” reflects the updated 2022 LOI between Air Canada and the unions. In particular, the Amendment provides for the following:
- The special-purpose trust is permitted to hold shares pursuant to the June 2009 MOU and the 2022 LOI;
- Amounts received or receivable by the special-purpose trust in respect of shares are not to be distributed unless each of the trade unions directs the trustee to contribute the amounts to one or more registered pension plans under which Air Canada is a participating employer, or the amounts are paid to recipients in the manner contemplated in the 2022 LOI; and
- All of the property of the special-purpose trust is distributed no later than December 31, 2037 (i.e., the tax accommodation will expire on this date).
If the above-noted conditions are satisfied, paragraph 6802(h) will continue to exempt the special-purpose trust from the operation of the RCA rules under the Act and Regulations.
Regulatory development
Consultation
The proposed Amendment (to paragraph 6802(h)) was included in a broad release of technical tax proposals to the public on August 12, 2024. No feedback was received from the public and the affected stakeholders did not request any modifications.
The proposed Amendment impacts a specific group, that being the employees and pensioners of Air Canada, their associated unions and Air Canada as an employer who negotiated the benefit payments with the unions. The parties to the 2022 LOI were consulted by the Department of Finance officials, and the parties agreed that December 31, 2037, is a reasonable date by which the special-purpose trust must distribute its assets and be wound-up.
The Amendment was exempt from prepublication in the Canada Gazette, Part I, as the public was already invited to share their views and feedback on these technical tax amendments, and it is not expected that further consultations would result in any feedback or modifications to the amendments.
Modern treaty obligations and Indigenous engagement and consultation
No impacts have been identified in respect of the Government’s obligations relating to rights protected by section 35 of the Constitution Act, 1982, modern treaties and international human rights obligations.
Instrument choice
Regulatory amendments are required to ensure the Air Canada special-purpose trust will continue to be exempt from the RCA rules. Given that an amendment to the Act is not required, a regulatory amendment appears to be the optimal instrument for a stand-alone amendment to the Regulations.
Regulatory analysis
Benefits and costs
The costs associated with the Amendment are insignificant for the Government of Canada and pertain to tax administration. They include salary costs for the CRA to prepare and communicate a positive tax ruling for Air Canada and additional tax filings (from the trustee) to be processed by the CRA due to the distribution of taxable employee benefits from the trust.
Employees and pensioners of Air Canada will benefit by receiving additional employee benefits, which may increase quality of life through increased purchasing power. In turn, these employees and pensioners may utilize their increased purchasing power to purchase more goods and services, thereby benefitting local businesses and the economy.
Small business lens
The Amendment does not impact small businesses due to its specific purpose in providing relief to Air Canada, its employees and pensioners.
One-for-one rule
The one-for-one rule does not apply, as there is no incremental change in administrative burden on business and no regulatory titles are repealed or introduced.
Regulatory cooperation and alignment
Given the Amendment’s purpose is to maintain the relief already provided to Air Canada under the Act and Regulations, international regulatory cooperation and alignment is not being considered.
Effects on the environment
In accordance with the Cabinet Directive on Strategic Environmental and Economic Assessment (SEEA Directive), a preliminary scan concluded that a SEEA is not required.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts were identified for this proposal.
Implementation, compliance and enforcement, and service standards
The Act provides the necessary compliance mechanisms for enforcement of the Regulations. These mechanisms allow the Minister of National Revenue and the CRA to assess and reassess tax payable, conduct audits and seize relevant records and documents. These regulations have a retroactive coming into force date of January 1, 2024.
Contact
Andrew F. D. Rodrigues
Tax Legislation Officer
Tax Legislation Division
Department of Finance
Telephone: 343‑596‑0727
Email: Andrew.Rodrigues@fin.gc.ca