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: What are the Canadian tax implications for a Canadian resident (“Taxpayer”) who works as a full-time employee at a corporation resident in the United States (“US”) and participates in its 401(k) plan?
Position: It is question of fact how a 401(k) plan will be treated under the Act. If there are no employer contributions to a 401(k) plan, the employee contributions will not be deductible under the Act. If there are employer contributions, a 401(k) plan will be considered an EBP.
However, despite this determination, paragraph 10 of Article XVIII of the Canada-US Convention states that all Taxpayer and employer contributions to “qualifying retirement plan” (“QRP”) will be deductible/excludible from the Taxpayer’s income. A 401(k) plan is considered a QRP.
The amount of contributions otherwise allowable as a deduction under paragraph 10 of Article XVIII may not exceed the individual's deduction limit for contributions to registered retirement savings plans (RRSPs) remaining after taking into account the amount of contributions to RRSPs deducted by the individual under the law of Canada for the year. The amount deducted by the individual under paragraph 10 of Article XVIII will be taken into account in computing the individual's deduction limit for subsequent taxation years for contributions to RRSPs.
Reasons: See below.
June 12, 2012
Re: Foreign pension plan
This is in response to your letter in which you requested information on the Canadian tax implications for a Canadian resident who works as a full-time employee at a corporation resident in the United States (“US”) and contributes to its 401(k) plan. Specifically you have asked whether the contributions are deductible. While we cannot address your specific situation, we are prepared to provide the following general comments.
A resident of Canada is taxed in Canada on all sources of worldwide income, subject to the foreign tax credit. A Canadian resident is required to include in his/her worldwide income the gross amount of employment income from US employment. The gross amount computed is before any potential payroll deductions related to contributions to the 401(k) plan.
It is unclear from your letter whether the employer is making contributions to the 401(k) plan for the benefit of the employee. Where an employer is making contributions to a 401(k) plan, it will generally be considered a pension plan. However, where the employer is not making contributions, it will generally not be considered a pension plan. This can have an impact on the treatment of the employee/employer contributions to the 401(k) plan under the Income Tax Act (“ITA”).
Despite the potential treatment under the ITA, paragraph 10 of Article XVIII of the Canada-United States Income Tax Convention (“Convention”) permits individuals residing in Canada and working in the US to deduct from income employee contributions made to a “qualifying retirement plan” (includes a 401(k) plan), and/or exclude from income contributions made on behalf of the employee to a “qualifying retirement plan” provided certain conditions are met. In this case, in order to be deductible:
the Canadian resident must perform services as an employee in the US;
the remuneration from these services must be taxable in the US ;
the remuneration must be borne by an employer that is resident in the US or by a permanent establishment which the employer has in the US; and
the contributions must also:
be attributable to the services described above;
be made to a qualifying retirement plan in the US in the year the employee performs the services; and
qualify for tax relief in the US.
The amount that is deductible by the Canadian resident for Canadian taxation cannot exceed the individual's deduction limit permitted for the year for contributions to a Registered Retirement Savings Plan (“RRSP”), after taking into account the amount of contributions made to other 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.
An individual's unused RRSP deduction room will continue to be reduced by an amount as prescribed in subsection 8308.2(1) of the Income Tax Regulations in respect of any employer contributions, if any, made to the plan in respect of the Canadian resident. 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 these comments will be of some assistance.
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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