27 January 2000 External T.I. 1999-0013695 - PENSION INCOME

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 Department.

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

Principal Issues: Can contributions to a U.S. 401(k) pension plan by a U.S. resident be received tax-free in Canada if the U.S. resident moves to Canada after he or she retires?

Position: No.

Reasons: There is no provision in the Act allowing for the deduction of such amounts. Generally, the full amount of pension receipts is taxable.

XXXXXXXXXX 1999-001369
M. P. Sarazin
Attention: XXXXXXXXXX

January 27, 2000

Dear Sirs:

Re: 401(k) Pension Plan Withdrawals and Taxation in Canada

This is in response to your letter dated November 22, 1999, wherein you requested our views regarding the taxation of payments to a person who is considering moving back to Canada after living in the U.S. for the last fifteen years out of his U.S. 401(k) plan that accumulated while the individual was employed and resident in the U.S. In particular, you ask whether any of the individual's contributions to the 401(k) plan would be exempt from tax in Canada. You also ask whether an individual's contributions to the 401(k) plan can be received tax-free where the individual transfers the amounts held in his or her 401(k) plan to an individual retirement account ("IRA") prior to becoming a resident of Canada.

Comments

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. 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.

Generally, a 401(k) plan is a pension plan requiring employee and employer contributions. The resident of the U.S. is entitled to deduct his or her contributions to the 401(k) and the full amount of any payments received from the plan are included in the recipient's income as pension income. This treatment of 401(k) plans in the U.S. is similar to our treatment of registered pension plans in Canada.

Under the Income Tax Act (the "Act"), a resident of Canada is taxed on his or her world income. An individual has to include any amounts received out of a pension or superannuation plan in his or her income under subparagraph 56(1)(a)(i) of the Act. As noted in paragraph 9 of Interpretation Bulletin IT-499R, a pension received by a resident of Canada out of an unregistered foreign superannuation or pension plan is subject to tax in the same way as a pension received from a source in Canada under subparagraph 56(1)(a)(i) unless exempted by the provisions of a tax treaty. Consequently, where the 401(k) plan is in fact a pension plan, the full amount paid out of the plan to a Canadian resident would be included in that person's income under subparagraph 56(1)(a)(i) of the Act. We note that there is no provision in the Act that provides for a reduction of the amount to be included in income in respect of the recipient's contributions made to the 401(k) plan while that person resided in the U.S.

Under paragraph 1 of Article XVIII of the Canada-U.S. Tax Convention (1980) (the "Treaty"), a resident of a Contracting State is taxable in that State with respect to pensions and annuities arising in the other Contracting State other than any portion of such payments that would be exempt from taxes in the State of source if the recipient were a resident thereof. Where the full amount would be taxed in the U.S. if the recipient were resident in the U.S., the Treaty allows the full amount received by the Canadian resident out of the 401(k) plan to be taxed in Canada.

The determination of how an amount received by a Canadian resident out of an individual retirement account ("IRA") in the U.S. would be taxed in Canada requires a review of all of the facts, including the terms of the particular IRA. However, we note that a "foreign retirement arrangement" ("FRA") is defined in subsection 248(1) of the Act as a plan or arrangement prescribed by regulation 6803 of the Income Tax Regulations (the "Regulations"). The Regulation then prescribes IRAs established under subsections 408(a), (b) or (h) of the United States Internal Revenue Code of 1986 (the "Code"). Where an IRA is not established under subsections 408(a). (b) or (h) of the Code, we would have to review all of the facts, including the terms of the IRA, to determine whether the IRA would be treated as a personal trust, a pension plan, an employee benefit plan, a retirement compensation arrangement, a salary deferral arrangement or some other form of arrangement for purposes of the Act.

Every person who receives a payment out of or under an IRA that is an FRA must include the amount of the payment in income in accordance with clause 56(1)(a)(i)(C.1) of the Act except to the extent the amount would not be subject to income taxation in the United States if the recipient were a U.S. resident. There is no provision in the Act that provides for a reduction of the amount to be included in income in respect of the recipient's contributions made to the IRA while that person resided in the U.S.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate