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: Can a Canadian Resident individual who works in the USA deduct contributions made to a foreign retirement plan?
Position: In many situations the contributions can be deducted.
Reasons: The Act and the Canada-USA Income Tax Treaty were amended to provide a deduction for employer and employee contributions in certain situations.
XXXXXXXXXX 2009-031922
Wayne Harding
August 17, 2009
Dear XXXXXXXXXX :
Re: Deductibility of Contributions made to Foreign Pension and Retirement Plans
This is in reply to your email correspondence of April 6, 23 and 24, 2009, concerning the deductibility of contributions made by Canadian resident employees to pension and other retirement plans of US employers.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.
While we cannot address your specific situations, we are prepared to provide the following general comments.
The Fifth Protocol to the Canada-United States Income Tax Convention (the Convention) includes amendments to Article XVIII of the Convention which, in general, permit individuals residing in one country and working in the other (generally referred to as "Cross-Border Commuters") to deduct contributions they make to a plan or arrangement in the country where they work provided certain conditions are met.
To be deductible:
- a Canadian resident Cross-Border Commuter must perform services as an employee in the U.S.;
- the remuneration from these services must be taxable in the U.S. and
- the remuneration must be borne by an employer that is resident in the U.S. or by a permanent establishment which the employer has there.
The contributions must also:
- be attributable to the services described above;
- be made to a qualifying retirement plan in the U.S. in the year the employee performs the services; and
- qualify for tax relief in the U.S.
A qualifying retirement plan is defined in general terms in the Fifth Protocol. However, Annex B of the Diplomatic Notes to the Convention, dated September 21, 2007, states:
"In the case of the United States, the term "qualifying retirement plan" shall include the following and any identical or substantially similar plan that is established pursuant to legislation introduced after the date of signature of the Protocol: qualified plans under section 401(a) of the Internal Revenue Code (including section 401(k) arrangements), individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), section 408(p) simple retirement accounts, section 403(a) qualified annuity plans, section 403(b) plans, section 457(g) trusts providing benefits under section 457(b) plans, the Thrift Savings Fund (section 7701(j)), and any individual retirement account under section 408(a) that is funded exclusively by rollover contributions from one or more of the preceding plans."
The amount that is deductible by a Cross-Border Commuter for Canadian taxation cannot exceed the individual's deduction limit for the year for contributions to a Registered Retirement Savings Plan ("RRSP"), after taking into account the amount of contributions made to RRSPs in the year. In addition, the contributions made must be taken into account in computing the individual's RRSP deduction limit for subsequent years.
It must also be noted that an individual's unused RRSP deduction room will continue to be reduced by a prescribed amount in respect of any employer contributions made to the plan in respect of the Cross-Border Commuter. In general terms, if the US based qualifying retirement plan is a money purchase plan (such as a 401(k) plan), the prescribed amount will in general, be equal to the lesser of (i) the amount of the employer's contributions made to the plan in respect of a year (including any contributions made after the year, (provided these latter contributions are recognized by the US as being made in respect of the year) and (ii) the money purchase limit for the previous year.
We trust that our comments will be of assistance to you.
Wayne Harding
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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