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. Will a transfer from a 401(k) plan to an IRA be a "distribution" as that term is contemplated in the definition of "refundable tax" in subsection 207.5(1) of the Act?
2. Will the amount included in the income of the employee under paragraph 56(1)(x) be eligible for deduction under subparagraph 110(1)(f)(i)?
3. Will we apply GAAR?
Position:
1. Yes
2. Yes
3. No
Reasons:
1. The transfer is a payment to a person as a benefit out of an RCA.
2. The amount is exempt from taxation in Canada by virtue of paragraph 1 of Article XVIII of the Canada - U.S. treaty.
3. The transaction will be undertaken for bona fide purposes other than to obtain a benefit under the Act.
XXXXXXXXXX 2001-006784
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
We are writing in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above taxpayer. We acknowledge subsequent documentation received and several telephone conversations (XXXXXXXXXX) in support of the request.
DEFINITIONS
a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1. as amended to the date hereof.
b) "CCRA" means the Canada Customs and Revenue Agency.
c) "Code" means the United States Internal Revenue Code of 1986, as amended to the date hereof.
d) "Custodian" means the trustees of the 401(k) Plan.
e) "Employee" means a Canadian resident employee of the Employer, on whose behalf contributions have been made to the 401(k) Plan for services rendered to the Employer that were primarily services rendered in Canada, or services rendered in connection with a business carried on by the Employer in Canada (or a combination of such services). Most of the Employees are under the age of 59 1/2.
f) "Employer" means XXXXXXXXXX, a Canadian resident corporation that is a subsidiary of SubCo.
g) "401(k) Plan" means a U.S. retirement plan qualified under section 401(k) of the Code, to which contributions have been made on behalf of the Employees. The 401(k) Plan has tax-deferred status in the U.S.
h) "IRA" means a plan or arrangement to which sections 408(a), 408(b) or 408(h) of the Code applies.
i) "ParentCo" means a U.S. resident corporation that controls SubCo.
j) "RCA" means a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.
k) "SubCo" means XXXXXXXXXX, a U.S. resident corporation.
l) "Treaty" means the Canada-United States Income Tax Convention, 1980 as amended to the date hereof.
Our understanding of the facts and the proposed transaction is as follows:
FACTS
1. The Employer is incorporated under the laws of XXXXXXXXXX and is a private corporation and a taxable Canadian corporation as those terms are defined in subsection 89(1) of the Act.
2. XXXXXXXXXX.
3. The head office and mailing address of the Employer is:
XXXXXXXXXX.
The Employer files its tax returns at the XXXXXXXXXX Taxation Centre and is served by the XXXXXXXXXX Tax Services Office.
4. In XXXXXXXXXX, ParentCo acquired SubCo and the Employer from an unrelated third party.
5. In XXXXXXXXXX, the unrelated third party referred to in 4 above established a 401(k) Plan for its employees and employees of its subsidiaries, including the Employees.
6. In XXXXXXXXXX, amounts were transferred to the 401(k) Plan from an employee profit sharing plan established by the unrelated third party referred to in 4 above for its employees and employees of its subsidiaries, including the Employees. The transfer was done on a tax-deferred basis under the provisions of the Code. No amounts were contributed to the employee profit sharing plan by the Employees, and no amounts with respect to the employee profit sharing plan have been included in the income of the Employees for purposes of the Act.
7. From XXXXXXXXXX, annual contributions of between XXXXXXXXXX of salary were made to the 401(k) Plan by the unrelated third party referred to in 4 above for the Employees. In XXXXXXXXXX, SubCo became the sponsor of the 401(k) Plan and continued making contributions on behalf of the Employees on the same basis until XXXXXXXXXX. No contributions have been made since XXXXXXXXXX . No amounts were contributed by the Employees, and no amounts with respect to the 401(k) Plan have been included in the income of the Employees for purposes of the Act.
8. The contributions to the 401(k) Plan for the Employees are deemed to be contributions to an RCA by virtue of subsection 207.6(5) of the Act. However, no amounts have been remitted to the CCRA as required by subsection 207.7(1) and paragraph 153(1)(p) of the Act. Employer has contacted the CCRA with respect to interest and penalties on these unremitted amounts.
9. A 401(k) plan must meet certain conditions under the Code in order to maintain its tax-exempt status. One condition is that it must be impossible under the terms of the plan for any part of the assets of the plan to be used for purposes other than for the exclusive benefit of the employees or their beneficiaries. Parentco has been advised that it is extremely likely that the payment of the 50% refundable RCA tax would be a penalty tax properly borne by the Plan sponsor, and any assets in the Plan could not be used to satisfy the refundable tax.
10. It has been noted that if amounts are paid directly to the Employees in a lump sum, the amounts would be subject to a 30% withholding tax and a 10% early withdrawal penalty since most of the Employees have not attained the age of 59 1/2 years. The 10% early withdrawal penalty would not be creditable against Canadian income taxes as a foreign tax credit.
PROPOSED TRANSACTION
11. The Employer intends to terminate participation by the Employees in the 401(k) Plan, and arrange for the funds to be transferred to an IRA for each of the Employees. This will be done on a tax-deferred basis under the provisions of the Code.
PURPOSE OF THE PROPOSED TRANSACTION
12. Parentco and Subco have determined that it is not economically feasible to permit the Employees to continue to participate in the Plan due to the facts described in 9 above.
13. To the best of your knowledge and that of the Employer, none of the issues involved in this request for an advance income tax ruling is:
a. in an earlier return of the Employer or a related person,
b. being considered by any tax services office or tax centre in connection with a previously filed tax return of the Employer or a related person,
c. the subject matter of any notice of objection filed pursuant to the Act by the Employer or a related person,
d. before the courts, or
e. the subject of a ruling previously issued by this Directorate.
RULINGS GIVEN
Provided the above statement of facts and description of the proposed transaction are accurate and constitute disclosure of all relevant facts and terms of the proposed transaction, and provided that the proposed transaction is completed as described, we rule as follows:
A. The transfer of an amount from the 401(k) Plan to an Employee's IRA will constitute a distribution as that term is contemplated in paragraph (c) of the definition of "refundable tax" in subsection 207.5(1) of the Act.
B. The transfer of an amount from the 401(k) Plan to an Employee's IRA will constitute an amount received by the Employee under paragraph 56(1)(x) of the Act, and will be included in the income of the Employee in the year of the transfer.
C. The amount included in the income of the Employee in B above may be deducted by the Employee in computing his or her taxable income for the year the amount is included in income, by virtue of subparagraph 110(1)(f)(i) of the Act and paragraph 1 of Article XVIII of the Treaty.
D. As a result of the proposed transaction, in and by itself, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.
The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 Advance Income Tax Rulings, dated January 29, 2001 and are binding on the CCRA provided that the proposed transaction is completed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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