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: The taxpayer requests our views on whether funds held in the Malaysian Employees Provident Fund may be transferred to a registered retirement savings plan on a tax-deferred basis.
Position: Question of fact.
Reasons: Without a review of the particular plan documents and the facts surrounding a participant's employment, we are unable to provide definitive comments.
May 16, 2016
Re: Employees Provident Fund of Malaysia
We are writing in response to your correspondence dated February 18, 2015, wherein you requested confirmation that the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) permits an individual who received a lump sum payment from the Employees Provident Fund of Malaysia (“EPF”) to contribute that amount to a registered retirement savings plan (“RRSP”) on a tax-deferred basis. We apologise for the delay in our response.
The EPF is administered by an agency of the Ministry of Finance Malaysia pursuant to the Employees Provident Fund Act 1991(“EPA”) of that country. The primary purpose of the fund is to provide retirement benefits for private sector employees and non-pensionable public sector employees.
Under the EPF, employees and employers are required to make minimum mandatory contributions, which are deductible under the limits imposed by Malaysian tax law. Employers and employees may also make additional voluntary contributions to the fund. Except in circumstances legislated under the EPA, a member is only entitled to withdraw accrued benefits relating to his or her contributions upon retirement at age 55, death, incapacity, or emigration from Malaysia.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, “Advance Income Tax Rulings and Technical Interpretations”.
Under certain conditions, subparagraph 60(j)(i) of the Act permits a deduction for a pension benefit received by an individual from a non-registered pension plan, such as a foreign pension plan, that is transferred to the individual’s RRSP. The foreign pension plan must constitute a superannuation or pension plan for purposes of the Act. The Act does not provide a definition of the term “superannuation or pension plan”. However, subsection 248(1) of the Act defines a “superannuation or pension benefit” to include “any amount received out of or under a superannuation or pension fund or plan…and, without restricting the generality of the foregoing, includes any payment made to a beneficiary under the fund or plan… in accordance with the terms of the fund or plan…”.
The determination of whether a foreign pension plan constitutes a superannuation or pension plan is a question of fact. It is the Canada Revenue Agency (“CRA”)’s long standing view that a foreign plan will be considered to be a superannuation or pension plan where contributions are made to the plan by or on behalf of the employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payment on or after the employee’s retirement. Whether the EPF falls within the meaning of a superannuation or pension plan will require a detailed review of the plan terms and conditions and the specific facts regarding the individual’s employment in Malaysia.
If the EPF is determined to be a superannuation or pension plan for purposes of the Act and accordingly a payment out of the fund is a pension benefit, the following conditions must be satisfied to deduct an amount under subparagraph 60(j)(i):
- The pension benefit must not be part of a series of periodic payments. Only lump sum payments are eligible for the deduction.
- The pension benefit must be attributable to services rendered by the individual (or the individual’s spouse or common-law partner) to an employer in a period throughout which the individual was not resident in Canada.
- The pension benefit must be included in the individual’s income in the year received under subparagraph 56(1)(a)(i) of the Act.
- An RRSP contribution must be made in the year the pension benefit is received or within the first 60 days after the end of that year. There is no requirement that the RRSP contribution be made by way of a direct transfer from the foreign pension plan.
- The individual must designate the RRSP contribution as a transfer in their income tax and benefit return for the year. The amount of the deduction is limited to the lesser of the amount designated and the amount of the benefit included in income. This deduction is over and above an individual’s regular RRSP deduction limit where the recipient is both the contributor and the annuitant.
If any portion of the EPF pension benefit described above is exempt from tax in Canada pursuant to the income tax convention between Canada and Malaysia (“tax agreement”), the individual who receives it still has to include the amount in income under clause 56(1)(a)(i) of the Act if he or she resides in Canada but that individual can claim an offsetting deduction under subparagraph 110(1)(f)(i) of the Act in computing the individual’s taxable income. In this regard, Article XVIII of the tax agreement applies to “pensions and annuities” paid by Malaysia to a resident of Canada. According to Article XVIII, a pension benefit received from the EPF is exempt from tax in Canada if it falls under paragraph 5(b) of Article XVIII, which deals with pensions received pursuant to paragraphs 7, 8 and 9 in Part 1 of Schedule 6 to the Income Tax Act, 1967 (Malaysia), provided that the pension is not subject to Malaysian tax. Accordingly, you may wish to confirm whether the EPF pension benefit described above qualifies under paragraph 5(b) of Article XVIII of the tax agreement in order to determine if it is also exempt in Canada. If an individual claims a deduction under subparagraph 110(1)(f)(i) of the Act then no deduction may be claimed by the individual under subparagraph 60(j)(i) of the Act.
If the EPF pension benefit described above is subject to tax withholdings in Malaysia and the tax withholdings are considered to be non-business income tax (“NBIT”), an individual may be entitled to claim a foreign tax credit (“FTC”) with respect to the NBIT deducted from the lump sum payment. Providing the individual does not claim a deduction under subparagraph 110(1)(f)(i), the gross amount of any EPF pension benefit included in income is used in calculating the FTC, even though all or a portion of the lump sum payment may be transferred to an RRSP.
You will find additional comments relating to transfers to RRSPs in paragraph 26 of Interpretation Bulletin IT-528, “Transfers of Funds Between Registered Plans”. Income Tax Folio S5-F2-C1, Foreign Tax Credit provides further information on the computation of the FTC. These publications are available on the Canada Revenue Agency website.
We trust our comments will be of assistance.
Lita Krantz, CPA, CA
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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