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) Whether a transfer from a workplace pension plan located in the UK to a UK SIPP established by a Canadian resident individual would be taxable under subparagraph 56(1)(a)(i) of the Act. (2) Whether a transfer from a UK SIPP to another UK SIPP established by the individual would be taxable. (3) Whether income and capital gains earned in the two SIPPs would be taxable.
Position: (1) Yes. (2) No. (3) Yes. Any income or capital gain earned in connection with the SIPP would be generally taxable in Canada on a current, annual basis.
Reasons: (1) The individual would be considered to have constructively received the transferred amount. (2) The SIPP is not a pension plan for the purposes of the Act, nor an employee benefit plan under the Act. (3) There is no exemption under the Canada-UK Income Tax Convention. However, to the extent the individual would be subject to tax in the UK in connection with the SIPP, a foreign tax credit may be available.
XXXXXXXXXX V. Pietrow
October 3, 2019
Re: Transfer of benefits to a UK SIPP
We are writing in response to your email dated May 15, 2019 concerning the transfer of benefits to a self-invested personal pension (SIPP) established in accordance with UK legislation. We also acknowledge your subsequent email correspondence.
We understand the two scenarios posed by you to be as follows:
In the First Scenario, an individual transfers the commuted value of their benefits under a workplace pension plan located in the UK to a SIPP that they would establish in accordance with UK legislation (the “First SIPP”). Their entitlement to benefits under the Plan relates to their employment in the UK while they were resident of the UK. At the time of the transfer, they are resident in Canada.
The Second Scenario is a continuation of the First Scenario. After having held the First SIPP for a period of time, the individual transfers all of the funds in the First SIPP to another SIPP that the individual would establish in accordance with UK legislation (the “Second SIPP”).
We assume that there are no employer contributions to either the First SIPP or the Second SIPP.
You have asked for our views as to whether the transferred amounts in the First and Second Scenarios would be taxable in Canada. We understand that plans commonly referred to as SIPPs are one of the types of registered personal pension schemes under UK legislation. A SIPP established by a member allows the member to direct how contributions are invested and generally allow a wider range of investments than with other registered personal pension schemes. The member is able to transfer the assets in the SIPP to another SIPP or other registered personal pension scheme established by the member. Income and capital gains earned in the SIPP are generally tax-exempt in the UK; however, the member pays UK tax on amounts distributed (beyond a stipulated tax-free amount) from the SIPP. The member generally cannot withdraw funds from the SIPP until the age of 55; however, all the funds in the SIPP will eventually be distributed to the member or, failing that, the member’s estate or designated beneficiaries. Thus, the SIPP is essentially an investment account fully controlled by the member, regardless of the member’s age.
In general, we understand that UK registered personal pension schemes are similar to Canadian registered retirement savings plans (RRSPs), while a UK SIPP established by a member is similar to a self-directed RRSP.
This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation. 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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
First and Second Scenarios
As a resident of Canada, a taxpayer is taxable under the Act on their worldwide income.
In determining the Canadian tax treatment of a foreign retirement plan, one needs to consider whether the plan is a pension plan or an employee benefit plan (EBP) for the purposes of the Act.
Whether a plan is a pension plan is a question of fact. Generally, a plan will be considered to be a pension plan under the Act where 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 and the contributions are used to provide an annuity or other periodic payment on or after the employee’s retirement.
Whether a plan is an EBP is determined by reference to the definition of EBP in subsection 248(1) of the Act. In general terms, an EBP requires contributions to be made by an employer for the benefit of the employer’s employees or former employees. A foreign pension plan would generally fall within the EBP definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan.
If no employer contributions have been made to a foreign retirement plan, the plan will not be considered a pension plan, nor an EBP. In accordance with Abrahamson v Minister of National Revenue, 91 DTC 213 (Tax Court of Canada), the fact that the original source of funds in a foreign individual retirement plan was a pension plan is not relevant.
If a UK foreign retirement plan is neither a pension plan nor an EBP, withdrawals from the plan would not be required to be included in the recipient’s income under paragraph 56(1)(a) of the Act as pension income nor under paragraph 6(1)(g) as an amount received out of an EBP. Nevertheless, any income or capital gain earned in connection with such a plan is generally taxable in Canada on a current, annual basis, the determination of which will depend on the characterization of the plan and its respective treatment under the Act. To the extent a taxpayer would be subject to tax in the UK in connection with the plan, a foreign tax credit may be available. For information on eligibility for, and how to claim, a foreign tax credit, please refer to Income Tax Folio S5-F2-C1, Foreign Tax Credit. Note that nothing in the Canada-UK Income Tax Convention provides relief from Canadian tax in this situation.
Furthermore, a taxpayer may be required to file foreign reporting information returns T1135 Foreign Income Verification Statement, T1141 Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities, T1142 Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust, and/or T1134 Information Return Relating to Controlled and Not-Controlled Foreign Affiliates, in respect of the taxpayer’s SIPP.
Transfer in the First Scenario
Subparagraph 56(1)(a)(i) includes in the income of a taxpayer for a taxation year most types of pension benefits received in the year. This includes benefits from a foreign pension plan that are attributable to services rendered by a person while the person was not resident of Canada.
The doctrine of constructive receipt ensures that taxpayers cannot avoid certain income inclusions under the Act by arguing that they never physically received income in their hands. In general terms, the doctrine achieves this by recognizing that by a taxpayer having the benefit of an amount, or an amount available to them, the taxpayer has constructively received the amount, which is the same as direct receipt under the Act.
Consistent with principles established in various court decisions, the CRA’s general views concerning constructive receipt are outlined in paragraph 10 of Information Bulletin IT-502, Employee Benefit Plans and Employee Trusts:
The Department considers an amount to have been received by [a taxpayer] out of the plan upon the earlier of the date upon which payment is made and the date upon which the [taxpayer] has constructively received a payment. Constructive receipt is considered to apply in situations where an amount is credited to [a taxpayer’s] debt or account, set apart for the [taxpayer] or otherwise made available to the [taxpayer] without being subject to any restriction concerning its use.
At issue with respect to the transfer in the First Scenario is whether, for the purposes of subparagraph 56(1)(a)(i), a taxpayer can be considered to have received a benefit from a UK workplace pension plan where the benefit is transferred at the direction of the taxpayer to a UK SIPP established by, for the benefit of, and fully controlled by the taxpayer (essentially an investment account). In our view and regardless of the taxpayer’s age, the taxpayer would be considered to have constructively received the benefit on the basis that, by virtue of the transfer, the benefit has been set apart for the taxpayer. Therefore, the taxpayer would be considered to have received the benefit in the year of the transfer and would be required to include the amount of the benefit in income under subparagraph 56(1)(a)(i).
Furthermore, even if constructive receipt were found not to apply, subsection 56(2) of the Act would apply to include the transferred amount in the taxpayer’s income under subparagraph 56(1)(a)(i) in the year of the transfer. In general terms, subsection 56(2) applies where a taxpayer directs or concurs in the payment of an amount to a third party (such as a SIPP) and that amount, if it had been paid to the taxpayer, would have been included in the taxpayer’s income. Where subsection 56(2) applies, that amount is required to be included in the taxpayer’s income.
The Act contains specific rules that allow for tax-deferred transfers from Canadian and foreign pension plans into RRSPs, provided certain conditions are met. However, these rules do not apply to transfers between foreign plans. Furthermore, there is nothing in the Canada-UK Income Tax Convention that would exempt such transfers from taxation in Canada.
Transfer in the Second Scenario
Amounts received by the individual out of either the First SIPP or the Second SIPP would not be required to be included in the individual’s income under the Act. Thus, the transfer of an amount from the First SIPP to the Second SIPP would not be included in the individual’s income. However, depending on the facts, the transfer of assets between SIPPs may result in a disposition and trigger a capital gain that would be taxable.
We have brought these various matters to the attention of the Department of Finance Canada for their consideration.
We trust our comments will be of assistance.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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