14 April 1986 Income Tax Severed Letter 5-0432 - []

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.

D.S. Delorey 957-2129

XXXX

April 14, 1986

Dear Sirs:

This is in reply to your letter of January 21 concerning the income tax implications inherent in a transfer of pension funds from a U.S. pension plan to a Canadian pension plan and vice versa. The particular situation which concerns you is described as follows:

XXXX

XXXX

Transfers to Canada

Our following comments relate to a U.S. based employee who takes up employment in Canada, either with the Canadian public service or a Canadian based commission, and are based on the assumption that for the purposes of the Canadian income tax act (the "Act") the employee would be considered to be resident in Canada (a question of fact) at the time the pension funds are transferred out of the U.S. pension plan. (Note - there would be no Canadian income tax liability if such a transfer is effected at a time that the employee is considered not to be resident in Canada for the purposes of the Act).

1. The funds transferred from the U.S. pension plan would represent both a "superannuation or pension benefit" and a benefit under an "employee benefit plan",.

2. To the extent that the transferred funds relate to services rendered in a period during which the employee was considered not to be resident in Canada for the purposes of the Act, the Canadian income tax implications are as follows:

(a) Since the exception in subparagraph 56(1)(a)(i) of the Act does not apply, the transferred funds are required to be included in income by virtue of that subparagraph. The exception set out therein does not apply because, by virtue of subparagraph 6(1)(g)(iii) of the Act, no amount is required to be included, in income under paragraph 6(1)(g).

(b) Since the transferred funds are to be rolled into a Canadian registered pension plan, the employee will be able to deduct the amount of the transferred funds under paragraph 60(j) of the Act. This deduction is available because the transferred funds represent "an amount described in subparagraph 6(l)(g)(iii)".

(c) To the extent that the transferred funds would not be taxable in the U.S. if the recipient were a resident thereof, a deduction may be made by the employee in computing his taxable income This deduction is available by virtue of the provisions of paragraph 110(l)(f) of the act and Article XVIII of the Canada U.S. Income Tax Convention (1980).

(d) If the funds transferred from the U.S. pension plan are subjected to a U.S. withholding tax, a foreign tax credit would be allowed with respect to such withholding.

3. To the extent that the funds transferred out of the U.S. pension plan relate to services rendered in a period during which the employee was considered to be resident in Canada for the purposes of the Act, the Canadian income tax implications are as follows:

(a) Only that portion of the transferred funds which exceeds the return of amounts contributed to the U.S. pension plan by the employee is required to be included in income. The reason for this is that, by virtue of the exception contained in subparagraph 56(1)(a)(i) of the Act, no portion of the transferred funds is required to be included in the employee's income under that subparagraph. Rather, the taxing provision is paragraph 6(1)(g) of the Act, and subparagraph (ii) of that provision exempts from income the portion of the transferred funds which represents a return of the amounts contributed by the employee.

(b) Since no amount would be included in income by virtue of subparagraph 56(1)(a)(i) of the Act, the paragraph 60(j) deduction referred to in 2(b) above would not be available.

(c) The treaty exemption referred to in 2(c) above will not apply because, as indicated in 3(a) above, the amounts contributed by the employee are already exempted.

Transfer to the U.S.

The following comments relate to a transfer of funds out of the XXXX Canadian pension plan when a Canadian based employee transfers to a U.S. based commission.

4. If the transfer of funds out of the XXXX Canadian pension plan is made at a time that the payee is considered to be resident in Canada, the amount of the payment is required to be included in income by virtue of subparagraph 56(1)(a)(i) of the Act.

5. If such a transfer is made at a time that the payee is considered not to be resident in Canada, the amount transferred is subject to a 25% Part XIII tax pursuant to paragraph 212(1)(h) of the Act, to the extent it exceeds such portion as may reasonably be regarded as attributable to services rendered by the person, to or in respect of whom the payment is made, in taxation years

(a) at no time during which he was considered to be resident in Canada, and

(b) throughout which he was not employed, or was only occasionally employed, in Canada.

Payments on Retirement

6. Once a retired individual begins to receive periodic pension payments out of a Canadian registered pension plan, the Canadian income tax implications are as follows:

(a) If the payee is considered to be resident in Canada at the time the pension payment is received, the payment is required to be included in income by virtue of subparagraph 56(l)(a)(i) of the Act.

(b) If the payee is considered not to be resident in Canada at the time the pension payment is made, the comments in 5 above apply except that the rate of Part XIII tax is 15%, rather than 25%.

7. Once a retired individual begins to receive periodic pension payments out of the Society's U.S. pension plan, the Canadian income tax implications are as follows:

(a) If the payee is considered to be resident in Canada at the time the pension payment is received, the comments in 1, 2 and 3 above apply.

(b) If the payee is considered not to be resident in Canada at the time the pension payment is received, there are no Canadian income tax implications.

We trust that the above comments will be of assistance. Should you require any additional information, please feel free to contact the writer.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch