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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
What are the income tax consequences of transferring all of the assets of a deregistered RPP to an unregistered U.S. pension plan?
The fair market value of the assets transferred is subject to withholding tax of 25%.
Paragraph 212(1)(j), 56(1)(x) of the Act and paragraph 1 of Article XVIII of the Canada-U.S. Income Tax Convention.
June 26, 2002
Registered Plans Directorate Income Tax Rulings
Attention: Mike Godwin G. Kauppinen
Transfer of Assets from Retirement Compensation
Arrangement ("RCA") to a Foreign Pension Plan
This is in reply to your memorandum dated January 15, 2002 wherein you requested our comments regarding the income tax consequences of the lump-sum transfer of all of the assets of an RCA to a non-registered pension plan in the United States due to the sale of a XXXXXXXXXX (the "franchise"). XXXXXXXXXX. The beneficiaries of the RCA (i.e., XXXXXXXXXX) were non-residents of Canada at all times before and after the sale of the franchise. The RCA was created due to the (intentional) deregistration of a non-contributory defined benefit registered pension plan of which XXXXXXXXXX were the member beneficiaries.
Tax Consequences to the Payor (i.e., the RCA)
Pursuant to paragraph 212(1)(j) of the Act, any amount described in paragraph 56(1)(x), such as a lump-sum transfer of all of the assets of an RCA to a U.S. resident pension plan, will be subject to a 25% withholding tax (subject to any relieving provisions of the Canada-U.S. Income Tax Convention ("Convention")).
Pursuant paragraph 3 of Article 18 of the Convention, the term "pensions" includes any payment under a superannuation, pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan, but does not include payments under an income-averaging annuity contract or any benefit under the social security legislation of either Canada or the United States.
An RCA, which generally provides for benefits to be paid after an employee retires may, nevertheless, not be a "pension plan" for purposes of the Convention. For example, RCAs which provide for retiring allowances or death benefits would not be "pensions" for purposes of the Convention. However, an RCA created by virtue of the deregistration of a defined benefit registered pension plan would normally be a "retirement arrangement" within the meaning of paragraph 3 of Article 18 of the Convention as long as the fundamental terms contained the plan had not changed before or after its deregistration. Assuming that, in this particular situation, the fundamental terms of the plan will not be changed, the lump-sum payment from the RCA would be a "pension" payment for purposes of the Convention.
Pursuant to paragraph 2(a) of the Convention, a reduced withholding rate of 15% is available if the pension payment is a "periodic pension payment". However, the term "periodic pension payment" is defined in section 5 of the Income Tax Conventions Interpretations Act and, paragraph (d) thereof, the part of the definition that relates to a periodic pension payment out of an RCA, does not include a one-time payment of all the assets of an RCA.
Tax Consequence to the former Canadian Employer
The former Canadian Employer is not in receipt of any payment from the RCA and therefore will have no income inclusion for Canadian income tax purposes as a result of the lump-sum transfer from the RCA.
Tax Consequence to the Beneficiaries of the RCA
The payment from the RCA to the U.S. plan is a direct payment. Therefore, assuming that the beneficiaries, before or at the time of the transfer to the U.S. pension plan, have no immediate right to distributions from the RCA, the only Canadian income tax exigible on the lump-sum transfer is the 25% withholding tax payable by the RCA as discussed above.
If you have further questions on this matter please contact Gord Kauppinen at 957-8971.
Roberta Albert, CA
Deferred Income Plans Section
Income Tax Rulings Directorate
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