Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Father lived in the U.S. and had a 401K plan. He died and left portion to Daughter a Canadian resident. Is it taxable in Canada and what are the tax consequences.
Position TAKEN:
The plan would be a foreign pension plan and amount received from the plan would be taxable pursuant to 56(1)(a). Also Daughter cannot change nature of payment either by will or otherwise
Reasons FOR POSITION TAKEN:
The ITA and based on previous positions taken.
XXXXXXXXXX 5-942813
December 6, 1994
Dear Sirs:
Re: Foreign Pension Plans
This is in reply to your letter of October 28, 1994 in which you request a technical interpretation on a situation where an individual inherits rights under a foreign pension plan.
The situation given in your letter appears to be an actual fact situation and as noted in Information Circular 70-6R2 we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. Where a completed transaction is involved, the enquiry should be addressed to the relevant District Taxation Office. Accordingly, we are only able to provide you with the following general comments.
The Department considers a U.S. 401(k) Plan to be a U.S. pension plan for purposes of the Income Tax Act (the "Act"). For Canadian tax purposes such a plan is either an "employee benefit plan" ("EBP") or a "retirement compensation arrangement" ("RCA") as both are defined in subsection 248(1) of the Act. Where the contributions to the 401(k) Plan were made during a period where the individual was a non-resident of Canada, the payment received out of the 401(K) Plan will be subject to the EBP rules.
Payments received by a resident of Canada out of such plans are included in income pursuant to paragraph 6(1)(g) of the Act unless the exception in subparagraph 6(1)(g)(iii) applies. Where this exception does apply, that is, where the pension payment is attributable to services rendered in a period throughout which the recipient was not resident in Canada, the payment is included in income pursuant to subparagraph 56(1)(a)(i) of the Act.
As noted in IT-499R a pension payment which is taxable under subparagraph 56(1)(a)(i) of the Act cannot, either by will or otherwise, be changed into a capital receipt.
In the situation referred to in your letter, it is our opinion that the payments received by Daughter out of the 401(k) Plan would be taxable in Canada and brought into Daughter's income pursuant to subparagraph 56(1)(a)(i) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
