13 April 2000 Internal T.I. 2000-0019127 - CANADIAN PARTICIPATION IN FOREIGN PP

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:

In certain circumstances, Regulation 8308.2 applies to reduce the amount a resident individual can contribute to an RRSP if the individual is a member of a foreign pension plan.

1. Does Regulation 8308.2 apply in respect of a US employee stock option plan (an "ESOP")?

2. Can the limitation be reduced where it does not reflect the actual benefits earned under the plan?

Position:

1. Question of Fact.

2. No.

Reasons:

1. The regulation applies to pension plans. An ESOP may or may not be a pension plan.

2. The amount of the reduction is calculated by a standard formula and cannot be modified to reflect actual benefits under the Plan.

		April 13, 2000

	WINNIPEG TAX CENTRE	HEADQUARTERS
	Client Services Division	W.C. Harding
(613) 957-8953
	Attention: Claudette Fritz
		2000-001912

XXXXXXXXXX

This is in reply to your facsimile of April 5, 2000, in which you asked if the pension adjustment (PA) in respect to the above noted individual may be recalculated to be less than 10% of his US employment earnings because the contributions to his employer's plan are in fact a substantially smaller amount.

While you refer to the calculation of a PA it appears your inquiry deals with the calculation of a prescribed amount calculated under the provisions of section 8308.2 of the Income Tax Regulations (the "Regulations"). A detailed explanation of Regulation 8308.2 may be found in Memorandum HDM 8199-9 issued by Head Office, Client Services Directorate on February 14, 2000 (enclosed). Basically the provision applies in situations where a Canadian resident is entitled to receive benefits under a foreign pension plan in respect of employment services rendered outside of Canada. Most commonly it applies to commuters that live in Canada but are employed in the United States. The Regulation prescribes an amount that is used to reduce an individual's RRSP deduction limit for a year in respect of the employee' participation in the plan during the preceding year. The intent of the provision is to reduce the amount of RRSP contribution room available to members of foreign pension plans so that their tax-assisted savings for retirement is comparable to that available to Canadian resident employees who are members of registered pension plans.

In simple terms, for the years 1997 through 2004, the prescribed amount is calculated as the lesser of the money purchase limit for the particular year and 10% of the individual's compensation for the year the services were rendered outside of Canada. If the provision applies, there is no provision for any reduction of the amount calculated.

It is of particular note that the Regulation applies only to situations where the employee participates in a foreign pension plan. In the situation under review the particular plan is identified as a United States Employee Stock Ownership Plan or "ESOP". Generally an ESOP is an arrangement under which an American employer makes annual contributions to a trust which then allocates them to employees, most commonly in proportion to the employee's compensation. The trust then uses the funds to acquire shares of the employer which it holds for the benefit of the employees. The shares, or an amount equal to the value of the shares, is subsequently paid out to the employees on a basis set out in the plan. Typically, an ESOP will distribute the shares at the time of an employee's termination of employment, death or retirement. Plans may also provide for the distribution to be made in one payment or over a number of years after retirement.

Depending on its specific terms, an ESOP that provides for the distribution of the shares on termination of an employee's services, may properly be described as a pension plan to which Regulation 8308.2 will apply. However, this can only be determined on a case by case basis after a complete review of the provisions of a particular plan. We would note that the prescribed amount is calculated by an individual when determining the individual's available RRSP contribution room. The Employer is not required it calculate it. In your case your client appears to have already determined that the plan is a pension plan. Accordingly in your review, you may wish to ascertain the basis for his determination.

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

??