23 July 2003 External T.I. 2003-0010435 - Foreign Pension PLan - 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 CCRA.

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

Principal Issues: (i) Whether contributions made by a Canadian employer to a foreign pension plan which is an employee benefit plan for Canadian tax purposes for the benefit of its sole non-resident employee/shareholder are deductible? (ii) Whether the employer is considered to have conferred a benefit on its sole employee/shareholder by making contributions to the foreign pension plan? (iii) If the employee/shareholder re-establishes residency in Canada, would income earned in a trust administering the foreign pension plan having the employee/shareholder as the sole trustee be taxable in Canada?

Position: (i) Yes; (ii) No; and (iii) Yes.

Reasons: (i) By virtue of subsection 18(10) or 32.1(1); (ii) The contributions are made to the foreign pension plan for the benefit of an employee, not for the benefit of a shareholder; (iii) The trust will likely be resident in Canada if the sole trustee becomes a resident of Canada.

XXXXXXXXXX 2003-001043
S. Leung
July 23, 2003

Dear XXXXXXXXXX:

Re: Foreign Pension Plan

We are writing in reply to your letter of March 24, 2003, in which you requested our opinion on certain issues arising in the situation outlined in your letter. You also provided us with a copy of the relevant trust agreement and documentation of the profit sharing plan referred to below.

The situation

1. Mr. A is a resident of the United States ("U.S."). He ceased to be resident in Canada several years ago.

2. Mr. A is the sole shareholder of Aco, a corporation incorporated in Ontario.

3. Aco conducts it business entirely in the U.S. and files U.S. tax returns in addition to its Canadian tax returns.

4. Mr. A is the sole employee of Aco and performs all his employment duties for Aco in the U.S. Other individuals are hired by Aco on a sub-contractor basis.

5. In XXXXXXXXXX, Aco, as employer, entered into an agreement with Mr. A, as the sole trustee of a trust (the "Trust") which was settled to provide for the funding of a profit sharing plan (the "Plan") set up in the U.S. for its employees. The Plan qualifies as a pension or retirement plan under section 401(a) of the Internal Revenue Code ("IRC") and the appropriate provisions of Employee Retirement Income Security Act and other applicable federal and state laws in the U.S. As a result, for U.S. tax purposes, Aco's contributions to the Plan are deductible in computing its income while Mr. A is not taxable on such contributions until he receives a distribution from the Plan. In addition, the earnings may accumulate in the Plan free of U.S. tax.

6. Mr. A may re-establish his Canadian residency at some point in the future.

You enquired:

(i) Whether the contributions made by Aco are deductible in computing its income for Canadian income tax purposes;

(ii) Whether subsections 15(1) and 212(2) and paragraph 214(3)(a) of the Income Tax Act (the "Act") would apply to Mr. A as a result of the contributions made to the Plan by Aco; and

(iii) If Mr. A were to resume Canadian residency, whether income earned in the Trust from the investment of the contributions would be taxed in Canada.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such taxpayers. However, we can offer the following general comments.

It appears that the Plan is not an "employee profit sharing plan" as that term is defined under subsection 144(1) of the Act because payments to the Plan are not computed by reference to an employer's profits from the employer's business or the profits from the business of a corporation with which the employer does not deal at arm's length. In this regard, XXXXXXXXXX.

It appears that the Plan is also not a "retirement compensation arrangement" (RCA) as that term is defined in subsection 248(1) of the Act because of paragraph (l) of the definition thereof. That paragraph provides an exception for a plan or arrangement from being a RCA if the plan or arrangement is maintained primarily for the benefit of non-residents in respect of services rendered outside Canada. In the situation outlined above, the sole employee is Mr. A, who is a non-resident of Canada and who performs all his employment duties outside Canada as described in 1 and 4 above.

Also, it appears that the Plan is not an "employee trust" (ET) as that term is defined in subsection 248(1) of the Act because the requirements of that provision are not met. Some of the requirements are that the right to the benefits of an ET must be vested at the time of each payment made by the employer and the amount of the payment must not depend on the individual's position, performance or compensation as an employee. In the situation outlined above, the benefits of the Plan do not vest immediately and the payment by the employer depends on the compensation of the employee. Furthermore, there is no election made to qualify the Plan as an ET as required by paragraph (c) of the definition of ET.

The Plan would probably not be a "salary deferral arrangement" (SDA) unless one of the main purposes for the creation of the right of a person to receive an amount is to postpone tax payable under the Act by that person in respect of an amount that is, or is on account or in lieu of, salary or wages of that person for services rendered by that person in the year or a preceding taxation year. In the situation outlined above, it appears that the salary of Mr. A, who is a non-resident of Canada performing services outside Canada, may not be taxable in Canada under subparagraph 115(1)(a)(i) or 115(1)(a)(v) of the Act. If Mr. A is not taxable in Canada on his employment income, then there is no tax payable under the Act with respect to that income to be deferred. Having said all the above, however, it is a question of fact whether one of the main purposes is to postpone tax payable under the Act. In this regard, all the facts and circumstances of the situation have to be reviewed before a determination can be made.

It appears therefore that the Plan is most likely an "employee benefit plan" (EBP) as that term is defined in subsection 248(1) of the Act. Normally, any contributions to an EBP by an employer are not deductible in computing the income of the employer pursuant to paragraph 18(1)(o) of the Act. However, paragraph 18(1)(o) does not apply in respect of a contribution to an EBP if any of paragraphs (a), (b) and (c) of subsection 18(10) of the Act apply. Paragraph (a) of subsection 18(10) of the Act deals with contributions made in respect of services performed by an employee who is not resident in Canada and who is regularly employed in a country other than Canada, where the contributions cannot reasonably be regarded as having been made in respect of services performed or to be performed during a period when the employee is resident in Canada. This paragraph seems to fit the situation outlined in your letter. Hence, the contributions made to the Plan by Aco are deductible in computing its income for Canadian income tax purposes under subsection 18(10) of the Act. If that subsection did not apply, a deduction by Aco may still be available under subsection 32.1(1) of the Act.

As the Plan appears to be a bone fide pension or retirement plan established in the U.S. under section 401(a) of the IRC for providing retirement benefits to the employees (as opposed to shareholders) of Aco, then, notwithstanding that the only employee of Aco is Mr. A who is also the sole shareholder of Aco, Aco would not be considered to have conferred a benefit on Mr. A as a shareholder under subsection 15(1) of the Act because of a contribution made by Aco to the Plan in favour of Mr. A, in and by itself.

If Mr. A re-establishes residency in Canada and continues to be the sole trustee of the Trust administering the Plan, the Trust would likely be considered to become a resident of Canada for income tax purposes. Subsection 128.1(1) of the Act would apply to the Trust. Any income earned in the Plan would be subject to tax in Canada in the hands of the Trust unless such income was paid out to the beneficiaries of the Plan in which case the beneficiaries would be subject to tax under either paragraph 6(1)(g) or 56(1)(a) of the Act, depending on whether or not the payment is a superannuation or pension benefit attributable to services rendered by the beneficiary in a period throughout which the beneficiary was not resident in Canada. If the payment is a superannuation or pension benefit, it would not be subject to tax under paragraph 6(1)(g) of the Act because of the exception contained in subparagraph 6(1)(g)(iii) but it would be subject to tax under paragraph 56(1)(a) of the Act; otherwise the payment would be subject to tax under paragraph 6(1)(g) unless it represents a return of amounts contributed to the Plan by the beneficiary as described in subparagraph 6(1)(g)(ii) of the Act.

If Mr. A re-establishes residency in Canada, there may be other tax implications that have not been dealt with in the preceding paragraph. For example, contributions made to the Plan by Aco would not be deductible by virtue of paragraph 18(1)(o) of the Act although Aco may still be able to claim a deduction under subsection 32.1(1) of the Act.

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

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

Eliza Erskine
A/Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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