29 June 1989 Ministerial Letter 73848 F - Withdrawal Form A U.S.A. "Deferred Profit Sharing Plan"

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.

SUBJECT:  Withdrawal form a U.S.A. "Deferred Profit Sharing Plan" (US-DPSP)

This is in reply to your letter of April 21, 19889 where in you requested our opinion on the taxability of amounts withdrawn from a US-DPSP in the following circumstances.

19(1)  Under United States rules, the employer contributions and any earnings in the plan are not taxable until the funds are withdrawn from the plan ( 19(1) ) did not make any contributions tot he plan.

The plan does not qualify as a DPSP in Canada and 19(1) thought she would report all of her accumulated earnings when they were paid to her from the plan.  She expects to receive full payment in 1989.

You also stated the 19(1) was advised by Revenue Canada in 1989 that she should have reported income from the plan and her employers contribution to the plan on a yearly basis as the amounts were vested as we understand it, you base this on the decision reached in Hogg v. The Queen, FCTD, 87 DTC 5447.

You noted that the plan, a copy of which you included, appeared to qualify as an Employee Profit Sharing Plan (EPSP) in accordance with section 144 of the Income tax Act (the "Act"), and asked:

1)     Would this plan qualify as an EPSP, and

2)     If it is not an EPSP would the proceeds be taxed as employment income or pension income?

We first note that in the case of Hogg, cited above, the plan involved was an employee saving plan which was not at the time (1979) an excluded plan under the then enacted provisions of paragraph 6(1)(a) of the act.  Similarly, the plan was not covered by the provisions for Employee Benefit Plans (EBPs) which were enacted fro taxation years subsequent to 1979 nor was it covered by any of the later enacted types of plans, most notably in the present case, Retirement Compensation arrangements ("RCA").  To the extent that these, or any other type of plan, may have application in a situation the finding s in Hogg may not prevail.

We secondly note that, in our opinion, the plan could not be an EPSP.  The two most significant reasons for this are:

1.     Article 18, Contributions, provides that contributions will be out of profits.  In this case, the plan may only be an EPSP if an election is made under the provisions of subsection 144(10) of the Act.  Please refer to Interpretation Bulletin 280 and Information Circular 77-1R3, para. 59; and

2.      Article 18, Contributions, provides that contributions to be made for any plan year will be determined prior to the end of the plan year.  the plan does not otherwise provide for contributions in accordance with a specific and stated formula as is required for EPSPs.  The plan is therefore inadequate, in this respect, in order for it to be an EPSP (see Information Circular 77-1R3, para. 59).

The plan appears to be one modeled in accordance with the provisions of section 401 of the United States' Internal Revenue Code (the "Code").  In these cases, we have taken the general view that, if the plan is one which is designed to provide retirement benefits, it will qualify as a superannuation plan for purposes of the Income Tax Act.

From our review of the plan, it is our opinion that it its directed primarily for providing pension benefits.  This is substantially borne out through article 5, "Type of Plan" and through the benefit provisions of article 11.  therefore, in our opinion the plan is, and has always been, a pension plan.  However, while the plan is pension plan, it is also non-resident and unregistered.  This leads to substantial complications in defining it for purposes of Canadian taxation.

With respect to your specific situation:

a.     From the plan's inception, (October 3, 1977 per article 17) to the end of 1979, the plan trust was a non-resident inter vivos trust and a pension plan.  For this period, the findings in the case of Hogg would have prevailed and amounts which vested in the beneficiary should have been taxed to her.

     You noted that 19(1) The terms of the plan in general provide for 100% vesting after completion of 6 or more years of service. However, it is of particular note that paragraph 2 of article 17 provides in part that:

     "Only years of service after the effective date of this Plan (October 3, 1977)are taken into account when determining a participants vested interest."

     As best as we can tell from the document submitted, 19(1)  must have been a member of a predecessor plan which was "restated" in accordance with the terms of the present plan.  accordingly, in our opinion, any contributions and income therefrom, earned in the plan prior to October 3, 1977 would not have vested except as provided in the restated plan.  In 19(1)  case the earliest any amount (20%) could have vested was October , 1979.  Therefore, 20% of all amounts allocated to her credit before December 31, 1970 should have been taxed to her in that year.  Since this amount was not taxed, however, subparagraph 56(1)(a)(i) of the Act may be applied to tax the amount on its receipt out of the plan since the amount would be considered as a superannuation or pension benefit.

b.        From 1980 to December 31, 1987 the plan was wholly an EBP. It should be noted that the enacting legislation for EBPs did not have any grand-fathering provisions to exempt plans existing at the end of 1979.  Accordingly, the plan merely became an EBP as of that date.

     The provisions of 6(1)(a) of the Act, applicable to the prior years, will no longer have application but the provisions of paragraph 6(1)(g) will.  This paragraph provides that amounts will be taxable only when they are received out of the plan. Therefore, since 19(1)  apparently did not receive any amounts during the period no amounts will be taxable to her throughout the period.

c.     For the period commencing January 1, 1988, the plan has been a hybrid plan, in part being an EBP in respect of contributions made prior to 1988 and income earned thereon, and in part being an RCA in respect of any contributions made or other income earned since that date.  Since it appears that the plan is going to be terminated in respect of 19(1) it may not be worthwhile to pursue complete application of the RCA provisions such as the filing of the RCA return and collection of the refundable tax.  For the purposes of this memorandum, we will restrict our discussion to the taxability of the beneficiary on her receipt of any amounts our of the plan.

     To the extent that the plan is an EBP, the rules are the same as noted above in paragraph (b).  To the extent it is an RCA, the provisions of paragraph 6(1)(a) will again not apply to tax vested but unpaid amounts and paragraph 56(1)(x) of the Act will apply instead to tax the receipt of any amounts our of that plan segment. In accordance with subsection 56(10) of the Act, amounts paid out of the plan will generally be considered to come first our of the RCA segment.  Paragraph 56(1)(a) of the Act will not apply to any amounts received out of either an EBP or an RCA in accordance with clauses 56(1)(a)(i)(D) or (E) thereof.

To recap, in the present case, should 19(1) receive a lump sum payment in 1989 in full satisfaction of her vested benefits under the plan:

a.     To the extent it reflects an amount which was vested in 1979, and not brought into income under paragraph 6(1)(a) of the Act, it must be reported as pension income in accordance with paragraph 56(1)(a) of the Act;

b.     To the extent it reflects amounts paid our of an EBP it must be reported in accordance with paragraph 6(1)(g) of the Act; and

c.     To the extent it reflects amounts paid out of an RCA it must be reported in accordance with paragraph 56(1)(x) of the Act.

for DirectorFinancial Industries DivisionRulings Directorate