8 January 2002 External T.I. 2001-0102765 - IMMIGRANT LUMP-SUM PENSION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Will a payment received by a Hong Kong civil servant before immigrating to Canada be taxable in Canada?

2. Can a lump-sum payment from a Hong Kong pension plan be rolled to an RRSP?

Position:

1. No.

2. Provided that the amount is received as a pension benefit, yes.

Reasons:

1. If the amount is employment income received prior to immigrating to Canada, Canada does not have the right to tax the amount because the individual is not resident in Canada and the employment income is not earned in Canada.

2. Subparagraph 60(j)(i) applies to a lump-sum amount received out of a foreign pension plan that is transferred to an individual's RRSP.

XXXXXXXXXX 2001-010276
M. P. Sarazin, CA
January 8, 2002

Dear XXXXXXXXXX:

Re: Civil Servant with Hong Kong Government

This is in reply to your letter of May 4, 2001, which was addressed to the International Tax Services Office and forwarded to us on September 24, 2001, requesting our views regarding the taxation under the Income Tax Act (the "Act") of amounts that will be received by a retired civil servant of the Hong Kong Government (the "Employer") who intends to eventually immigrate to Canada.

The individual expects to retire by the end of 2001 and will be entitled to receive a lump-sum payment from the Employer's pension plan (the "Pension Plan") in early 2002. Before the individual leaves Hong Kong, he will also be entitled to receive an interest-bearing loan for an amount equal to his pre-retirement leave (the "Leave") salary less any interest on the amount. The individual will not be entitled to receive the lump-sum pension payment from the Pension Plan until the end of the Leave period.

Comments

It appears that the opinions you seek relate to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R4 dated January 29, 2001, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of Interpretation Bulletins and Information Circulars are available on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. However, we can provide you with the following general comments.

Under the Act, a Canadian resident is required to report his or her world income from sources both inside and outside Canada. Under subsection 2(3) of the Act, a non-resident is only required to report his or her income from employment in Canada, income from a business carried on in Canada and any gains from the disposition of taxable Canadian property. We will assume that the individual referred to above does not have any income that is subject to subsection 2(3) of the Act.

The determination of whether an amount paid by an employer to an employee would constitute a loan or the payment of salary is a question of fact. To make this determination, we would have to look at all of the facts including the terms of the employment and the terms of the loan agreement. Where it is determined that the amount paid by the Employer constitutes salary for employment services performed for the Employer in Hong Kong and not a loan and the amount is paid before the individual immigrates to Canada, the amount paid will not be taxable in Canada.

Without sufficient information, we cannot determine whether any amount would be considered a retiring allowance for purposes of the Act. In this regard, you may want to refer to Interpretation Bulletin IT-337R3, entitled "Retiring Allowances". If it is determined that the amount paid by the Employer prior to the individual's immigration to Canada in respect of the Leave is, in fact, a retiring allowance, the payment would not be eligible for rollover to a registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Act because the amount was not included in the recipient's income under subparagraph 56(1)(a)(ii) of the Act.

The determination of whether the lump-sum payment from the Pension Plan can be transferred to a RRSP for the individual is also a question of fact.

The Agency's general views regarding the transfer of amounts from non-registered pension plans to a RRSP are found in Interpretation Bulletin IT-528 titled "Transfers of Funds Between Registered Plans". Paragraph 26 of IT-528 discusses the application of subparagraph 60(j)(i) of the Act which allows a deduction for the transfer of a superannuation or pension benefit (that is not part of a series of periodic payments) from a non-registered pension plan for services provided by an individual in a period throughout which that individual was not resident in Canada. To be eligible for a deduction under subparagraph 60(j)(i) for the transfer of the superannuation or pension benefit to an individual's RRSP, the individual has to include such a benefit in income for the year under subparagraph 56(1)(a)(i) of the Act and the transfer has to be made for the year the amount is included in the individual's income or within 60 days after the end of the year. Consequently, to be eligible for the transfer under subparagraph 60(j)(i) of the Act, the lump-sum payment from the Pension Plan would have to be received by the individual subsequent to his immigration to Canada. It should also be noted that the transfer of the superannuation or pension benefit under subparagraph 60(j)(i) of the Act has to be made to the individual's RRSP and not to a spousal RRSP established for the benefit of the individual's spouse.

For purposes of the Act, the term "superannuation or pension benefit" is defined under subsection 248(1) of the Act to include any amount received out of or under a superannuation or pension fund or plan and any payment made to a beneficiary under such a plan or fund in accordance with the terms of, or resulting from the amendment or termination of, the plan or fund. The determination of whether a particular plan would constitute a superannuation or pension fund for purposes of the Act is a question of fact. Generally, a plan will be considered a superannuation or pension fund where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodical payment on or after the employee's retirement in consideration for his or her employment services. In some cases, a plan may be considered a superannuation or pension fund where amounts have been contributed by a government. If it is determined that the Pension Plan is a superannuation or pension fund for purposes of the Act, amounts received by a Canadian resident out of the Pension Plan subsequent to his or her immigration to Canada would be included in the recipient's income under subparagraph 56(1)(a)(i) of the Act. The determination of whether a specific lump-sum payment from the Pension Plan would constitute a superannuation or pension benefit for purposes of the Act is a question of fact.

We note that the courts have generally found that a plan will not be a superannuation or pension plan where only the beneficiary of the plan has made contributions. The courts have in particular, frequently cited the 4th definition of pension as set out in the Shorter Oxford English Dictionary as support for their decisions. This definition provides that a pension is:

"4. An annuity or other periodical payment made, esp. by a government, a company, or an employer of labour, in consideration of past services."

Because of these decisions, we have accepted the general position that amounts received out of a foreign plan where only employee contributions have been made, are not superannuation or pension benefits.

We trust these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate