7 November 2022 External T.I. 2022-0926091E5 - Transfer of UK DB pension benefits to a UK SIPP

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) In a described situation, whether the amount transferred from a UK DB pension plan to a UK SIPP has to be included in the member’s income under paragraph 56(1)(a) in the tax year of the transfer. (2) Whether the transfer constitutes a “contribution” of property (within the meaning of subsection 94(1)) by the member to the trust governed by the UK SIPP.

Position: (1) Yes. (2) Yes.

Reasons: (1) The amount will have to be included in the member’s income under paragraph 56(1)(a) by virtue of the constructive receipt doctrine or by virtue of the application of subsection 56(2). (2) Paragraph (a) of the “contribution” definition.

									November 7, 2022

XXXXXXXXXX								2022-092609
V. Pietrow

Dear XXXXXXXXXX:

RE: Transfer to a United Kingdom (“UK”) Self-Invested Personal Pension

We are writing in response to your letters of January 26, 2022 and March 9, 2022 regarding the Canadian income tax treatment of a transfer of benefits under a defined-benefit workplace pension plan located in the UK (the “UK DB Plan”) to a self-invested personal pension (“UK SIPP”). In particular, you asked for our views as to whether the transferred amount of the commuted value of a member’s benefits of the UK DB Plan (“Commuted Value”) will need to be included in the member’s income under paragraph 56(1)(a) of the Income Tax Act (the Act) (footnote 1) by virtue of the constructive receipt doctrine or by virtue of the application of subsection 56(2). In addition, you also asked for our views on whether the transfer would constitute a “contribution” of property (within the meaning of subsection 94(1)) by the member to the trust governed by the UK SIPP.

You provided the following scenario:

• An individual (the “Individual”) resident in the UK becomes a member of a UK DB Plan established by the Individual’s UK employer.
• The Individual’s entitlement to benefits under the UK DB Plan relates to services rendered by the Individual while employed in and resident of the UK.
• The Individual’s UK employer made contributions to the UK DB Plan but no contributions were made in the period throughout which the Individual was a non-resident of the UK.
• The UK DB Plan is a pension plan for the purposes of the Act.
• After the Individual becomes a resident of Canada, a trust governed by a UK SIPP is established pursuant to UK legislation of which the Individual is the sole beneficiary.
• The Individual directs the transfer of the Commuted Value to the UK SIPP (the “Transfer”).
• The Transfer takes place directly between the administrators of the respective plans.
• At the time of the Transfer, the Individual is a resident of Canada and has not reached the age of 55.
• In the case of this particular UK SIPP, investment advice of the UK SIPP is provided on a non-discretionary basis with the Individual only being entitled to affirm or veto recommended transactions with no capacity to place or direct trades within the UK SIPP.

You have indicated that, under the relevant UK legislation, income accrued or realized (e.g., interest, dividends and capital gains) in a UK SIPP is sheltered from tax in the UK until such time as the funds are withdrawn from the UK SIPP. Funds in a UK SIPP cannot be withdrawn prior to age 55, except in the event of ill health or terminal illness, and must be crystallized no later than age 75.

As well, you have indicated that a transfer from a UK DB Plan to a UK SIPP has to take place directly between the administrators of the plans and UK legislation dictates that the transfer is subject to the permission of the trustee of the UK DB Plan and is subject to review by an approved independent advisor who provides independent advice to the member on whether the transfer is in the best interest of the member.

Our comments

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Income tax treatment of the Transfer

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 is whether, for the purposes of subparagraph 56(1)(a)(i), the Individual can be considered to have received a benefit from a pension plan. In our view and regardless of the Individual’s age, the Individual is considered to have constructively received the benefit on the basis that, by virtue of the Transfer, the benefit has been set apart for the Individual. Therefore, in our view, in the scenario you posed, the Individual would be considered to have received the benefit (i.e., the Commuted Value) 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). This view is consistent with our earlier positions.

Furthermore, it is our view that even if the constructive receipt doctrine were found not to apply, subsection 56(2) would apply to include the Commuted Value in the Individual’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 UK 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.

Definition of “contribution” in subsection 94(1)

In the context of the above-described scenario, you also asked for our views as to whether the Transfer would be a “contribution” within the meaning of subsection 94(1) by the Individual to the UK SIPP. The “contribution” definition is relevant for the non-resident trust rules in section 94.

With respect to the scenario (the “main scenario”), you asked us to assume that contributions to the UK DB Plan are made solely by the UK employer and that the Individual makes no contribution to the UK DB Plan either before or after becoming resident of Canada. You also asked us to consider an alternative scenario, the difference from the main scenario being that contributions to the UK DB Plan are made by the UK employer in relation to the Individual, and by the Individual, while the Individual is employed by the UK Employer and is a UK resident and a non-resident of Canada. As well, you asked us to assume that, in either scenario, the Individual makes no contributions to the UK SIPP other than the Transfer.

In our view, in either the main scenario or the alternative scenario, the Individual would be considered to have received, at the time of the Transfer, the Commuted Value from the UK DB Plan (as we stated above) and then would be considered to have made, immediately afterwards, a “transfer” (within the meaning of paragraph (a) of the “contribution” definition in subsection 94(1)) of that amount by the Individual to the UK SIPP. Thus, there would be a “contribution” by the Individual to the UK SIPP trust.

As we were not requested to, we are not providing any other comments regarding the applicability of section 94 to the UK SIPP trust.

We trust that these comments will be of assistance.

Yours truly,

Irina Schnitzer
A/Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise indicated, all references are to the Act.