11 October 1988 Income Tax Severed Letter 5-6363 - [Payments and Lump sum transfers from U.S. pension plans]

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.

Oct 11 1988 O.S. Laurikainen (613) 957-2125

Dear Sir:

Re: Payments and Lump sum transfers from U.S. pension plans

This is in response to your letter of July 19, 1988 and our telephone conversation of September 12, 1988. You have enquired about the Canadian tax treatment of amounts received by residents of Canada out of United States pension plans in general and more specifically payments received from U.S. Individual Retirement Accounts (IRA's).

There are a variety of different pension plans and the Canadian tax treatment of transfers and payments will often depend on the nature of the particular plan. Where the U.S. pension plan qualifies as an "employee benefit plan" and is not a "retirement compensation arrangement" as those terms are defined in Subsection 248(1) of the Canadian Income Tax Act (the "Act"), we offer the following comments concerning the transfer of U.S. pension funds by a resident of Canada.

1) To the extent that the transferred pension funds are attributable to services rendered in a period during which the employee was not resident in Canada for the purposes of the Act, the Canadian income tax implications are as follows:

a) Where the exception in clause 56(1)(a)(i)(D) of the Act does not apply, all of the transferred funds are required to be included in income by virtue of subparagraph 56(1)(a)(i) of the Act. The exception set out in clause (D) does not apply where, 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) of the Act.

b) If the 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(1)(g)(iii)" of the Act.

c) To the extent that the transferred funds would not be taxable in the U.S., if the recipient were resident thereof, a deduction may be made by the employee in computing his taxable income. This deduction is available by virtue of paragraph 110(1)(f) of the Act and Article XVIII of the Canada-U.S. Income Tax Convention (1980) (the "Convention").

d) If the funds transferred from the U.S. pension plan are subjected to a U.S. withholding tax, a foreign tax credit may be allowed pursuant to section 126 of the Act.

2) To the extent that the funds transferred out of the U.S. pension plan are attributable to services rendered in a period during which the employee was resident in Canada, the Canadian income tax implications are as follows:

a) Only that portion of the transferred funds which exceed the return of amounts contributed to the U.S. pension plan by the employee is required to be included in income. 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 (b) above would not be available.

c) The treaty exemption referred to in 1(c) above will not apply because, as indicated in 2(a) above, the amounts contributed by the employee are already exempted by virtue of subparagraph 6(1)(g)(ii) of the Act.

Tax provisions governing the taxation of amounts received from a U.S. pension plan that qualifies as a "retirement compensation arrangement" are entirely different from the above. Amounts received out of such plans will be included in income by virtue of paragraphs 56(1)(x), (y) and (z) of the Act, depending on the circumstances. Where such an amount is included in income by virtue of paragraph 56(1)(x) of the Act and the payment represents a retiring allowance, it will be eligible for a rollover to a registered pension plan or a registered retirement savings plan to the extent permitted under paragraph 60(j.1) of the Act.

The above comments only provide an outline of the general treatment of funds transferred from a foreign pension plan to Canada. In order to determine the treatment appropriate for a particular transfer, we would need to review the details of the plan and the status of the employee. We have attached a copy of IT-502 "Employee Benefit Plans and Employee Trusts" for you information. Also attached is a copy of our general position outlining the Canadian tax treatment of amounts received out of an United States Individual Retirement Account (IRA), which you indicated you were specifically interested in.

We trust that you will find our comments of assistance to you.

Yours truly,

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

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