CRA rules that the transfer of a portion of the assets and Canadian beneficiaries from an old to a new US pension plan will not result in constructive receipt to the Canadian beneficiaries

S. 56(1)(a) generally requires the recognition of an amount received as or in satisfaction of a pension benefit. A portion of a multi-employer US defined benefit pension plan (a qualified plan under IRC s. 401(a)) was held for the benefit of Canadian-resident participants. CRA ruled that a transfer of a portion of the assets in this plan to a new plan (also qualifying under IRC s. 401(a)) established for the benefit of a portion of the beneficiaries of the old plan, including some of the Canadian beneficiaries, so that they ceased to be participants in the old plan, did not trigger any income inclusion under s. 56(1)(a).

The CRA tags also mentioned Art. XVIII of the Canada-US Treaty, which effectively seems to indicate that even if the amounts transferred directly between the old and new plan were somehow regarded as pensions paid to the Canadian beneficiaries, they would not be subject to Canadian tax if they would not have been subject to US tax if such beneficiaries had been US residents (such transfers indeed were exempt under the Code).

CRA also accepted a representation that the administration of the old plan for the benefit of the Canadian residents was exempted from the resident’s arrangement rules in ss. 207.6(5) and (5.1) by virtue of satisfying the prescribed contribution conditions in Reg. 6804 relating to foreign plans maintained by foreign non-profit organizations, and that the same would apply regarding the Canadian participants and related assets transferred to the new plan.

Neal Armstrong. Summary of 2021 Ruling 2021-0876671R3 under s. 56(1)(a)(i).