18 February 2000 External T.I. 1999-0015535 - TRANSFER TO IRA FROM EBP

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:

1) Where a U.S. employer transfers an amount from a plan or arrangement that constitutes an employee benefit plan for purposes of the Act to a former employee's IRA and the former employee is now a resident of Canada, will the amount transferred have to be included in the former employee's income?

2) Will the full amount eventually received from the IRA be taxable?

Position: 1) Yes 2) Yes

Reasons:

1)The amount is being paid to the IRA on the former employee's behalf. 2)The full amount is included under the Act.

XXXXXXXXXX 1999-001553
M. P. Sarazin
Attention: XXXXXXXXXX

February 18, 2000

Dear Sirs:

Re: Transfers to IRA by Resident of Canada

This is in response to your letter dated December 21, 1999, wherein you requested our confirmation of your understanding of the application of the Income Tax Act (the "Act") in the following situation.

A U.S. resident individual worked in the United States and earned benefits under a plan established by his or her U.S. employer for its employees (the "Plan"). The Plan is not a pension plan for purposes of the Act or for purposes of the Canada-U.S. Tax Convention (1980). The individual moved to Canada and ceased to earn additional entitlements under the Plan. The individual has been a resident of Canada for more than five years. The individual has been given options with respect to his or her entitlements under the Plan. The present value of the individual's entitlements under the Plan may be kept in the Plan, transferred to an Individual Retirement Account ("IRA") established under subsections 408(a), (b) or (h) of the Internal Revenue Code, or paid-out immediately.

You are of the view that, if the individual transfers his or her entitlements to an IRA, the full amount, net of the individual's contributions included in such amount, would be included in the individual's income under paragraph 6(1)(g) of the Act and the amounts eventually received out of the IRA will also be taxed upon receipt by the individual.

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 the Canada Customs and Revenue Agency (the "Agency"). 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. Copies of Information Circulars and Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.

The determination of whether a plan or arrangement established by an employer would constitute an employee benefit plan, within the meaning assigned by subsection 248(1) of the Act, is a question of fact. The Agency's general views regarding employee benefit plans are found in Interpretation Bulletin IT-502 titled "Employee benefit plans and employee trusts".

If it is determined that the former U.S. employer's plan is an employee benefit plan and not a pension plan for purposes of the Act, the transfer of property by the plan administrator to an IRA established for the benefit of the individual will constitute an amount received by the individual for purposes of the Act. Pursuant to subparagraph 6(1)(g)(ii) of the Act, the individual can reduce the amount to be included in his or income by the amount which represents a return of contributions made to the plan by the individual.

We confirm that any amounts received out the individual's IRA will be included in the income under clause 56(1)(a)(i)(C.1) of the Act.

We have forwarded a copy of this letter and a copy of your incoming letter to our International Tax Section. They will respond to your question relating to whether Competent Authority would approve the deferral of taxes under the Act in respect of any transfer to an IRA and whether the deferral would be affected if the IRA does not qualify as a foreign retirement arrangement for purposes of the Act.

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

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch