19 October 2004 External T.I. 2004-0083571E5 - Interaction of 401(k), IRA and RRSP

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.

Principal Issues: 1) Can a Canadian resident employed in the United States contribute to a 401(k) plan, an IRA and an RRSP?

2) Is an individual taxable in Canada on payments received from a 401(k) or an IRA?

Position:	1) Yes, a Canadian resident employed in the USA can contribute to a 401(k), an IRA and an RRSP.  However, the person's RRSP deduction limit may be reduced by a prescribed amount in accordance with section 8308.2 of the Regulations.  			2) Yes, an individual is generally taxable in Canada on payments from a 401(k) plan or IRA.  The foreign tax credit may reduce tax payable.

Reasons: 1) Section 8308.2 of the Regulations applies when an individual is resident in Canada, renders employment service to a foreign employer outside Canada and becomes entitled to benefits under a pension plan that is a foreign plan in respect of those services. It is a question of fact whether any given 401(k) or IRA is a pension plan that is a foreign plan.

2) Where a 401(k) or IRA is a pension plan, and the benefit relates to service while a resident, a payment is considered to be from an EBP and taxed under paragraph 6(1)(g). If the 401(k) or IRA is a pension plan, but the benefit relates to service while not a resident, it is carved out of the EBP definition and taxed as a pension or superannuation benefit under paragraph 56(1)(a). If the IRA is a foreign retirement arrangement within subsection 248(1) and section 6803 of the Regulations, it is taxed under clause 56(1)(a)(C.1)

2004-008357
XXXXXXXXXX Renée Shields
(613) 948-5273
October 19, 2004

Dear XXXXXXXXXX:

Re: Interaction of 401(k) Plans and Individual Retirement Account (IRA)
Plans with Registered Retirement Savings Plans (RRSPs)

This is in response to your letter of March 16, 2004 inquiring about the ability of a Canadian resident who works for an American employer in the United States to participate in a 401(k) plan, an IRA and contribute to an RRSP.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. This circular and any other publication referred to herein can be accessed on the Canada Revenue Agency ("CRA") website at the following address: http://www.cra-arc.gc.ca. Where a situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, the following general comments, which are not binding on the CRA, may be of assistance.

The CRA's general views regarding the effect on the RRSP deduction limit of a Canadian resident employed outside of Canada by a foreign employer are contained in the Pension Adjustment Guide (T4084) (the PA Guide"). If, in any given year, a Canadian resident individual becomes entitled to receive benefits under a pension plan that is a foreign plan in respect of employment services rendered outside Canada, section 8308.2 of the Income Tax Regulations (the "Regulations") prescribes a reduction to that individual's RRSP deduction limit for the following year. The PA Guide explains how the prescribed amount is calculated.

The intent of section 8308.2 of the Regulations 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. Most commonly this provision applies to commuters who live in Canada but are employed in the United States.

In determining whether an individual is subject to the foregoing reduction to his or her RRSP deduction limit, it must be ascertained whether the benefit arises from a pension plan, and if so, whether that pension plan is a foreign plan. In general, for Canadian tax purposes, an arrangement is a pension plan if contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee or, in some cases, where amounts have been contributed by a government.

A foreign plan is defined in section 8308.1 of the Regulations by reference to the definition of retirement compensation arrangement in subsection 248(1) of the Act. Accordingly, a plan will be considered a foreign plan if it:

? has contributions made to it by an employer or former employer of a taxpayer for benefits that may be received by a person after the retirement of the taxpayer, or the loss of the employment of the taxpayer, and

? is maintained by the employer primarily for the benefit of non-residents in respect of services rendered outside Canada.

It will be a question of fact whether any particular 401(k) plan or IRA in which an individual is participating is a pension plan that is a foreign plan and therefore subject to the application of section 8308.2 of the Regulations and the resulting reduction of the individual's RRSP deduction limit.

You have also asked about the taxation of amounts paid to a Canadian resident from a 401(k) plan or an IRA. Generally, assuming the 401(k) plan or IRA qualifies as a pension plan, and provided the payment represents benefits for a period of service while the person was resident in Canada, payment out of the plan is taxable as income from an employee benefit plan ("EBP") under paragraph 6(1)(g) of the Act. This EBP treatment means the taxpayer is permitted to exclude from income the portion of the payment that represents a return of employee contributions, to the extent that such amounts were previously included in income.

If the plan qualifies as a pension plan but the payment represents a benefit for a period of service while the person was not resident in Canada, it is excluded from the definition of an EBP benefit by subparagraph 6(1)(g)(iii) of the Act. In such a case, the amount is taxed as a superannuation or pension benefit under paragraph 56(1)(a) of the Act.

It should be noted that not all IRAs would be considered pension plans. The Roth IRA is one such exception. Furthermore, certain IRAs, namely those described in 408(a)(b) and (h) of the U.S. Internal Revenue Code, are prescribed to be foreign retirement arrangements by the Act and Regulations and as such are taxed as pension or superannuation benefits under clause 56(1)(a)(C.1) of the Act.

To the extent that taxes are paid to the U.S. government on amounts withdrawn from a 401(k) plan or IRA, the taxpayer can utilize the foreign tax credit to reduce Canadian tax payable. The CRA's general views on the foreign tax credit are contained in Interpretation Bulletin IT-270R2, "Foreign Tax Credit."

We note that if a pension or annuity payment would be excluded from the taxable income of a U.S. resident, it would also be exempt from taxation in Canada pursuant to paragraph 1 of Article XVIII of the Canada-United States Income Tax Convention. Whether this would be the case would be a question of fact to be determined based on the nature of the payment in question.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch