6 August 1991 External T.I. 9113895 F - Transfer of Funds from a U.S. or U.K. Pension Plan to a Registered Pension Plan (RPP)

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.

5-911389

Dear Sirs:

This is in reply to your letter of May 21, 1991 concerning the transfer of funds from a U.S. or U.K. pension plan to a registered pension plan ("RPP") and vice versa.

Your enquiry appears to relate to specific taxpayers involved in specific transactions, either completed or proposed.  As indicated in paragraph 21 of the enclosed Information Circular 70-6R2, written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in that Circular. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The following comments are therefore of a general nature only.

Where an amount is transferred from a foreign pension plan to an RPP on behalf of an individual at a time that the individual is not resident in Canada for the purposes of the Income Tax Act (the "Act"), the transfer will not be a taxable event.  Also, a lump-sum or periodic payment out of a foreign pension plan to an individual will not be a taxable event if the payment is made at a time that the individual is not resident in Canada for Canadian income tax purposes.

The following comments are based on the assumption that the transfer is effected, or the payment out of the foreign pension plan is made, at a time that the relevant individual is resident in Canada for Canadian income tax purposes.

Where funds in a foreign pension plan corresponding to an employee's entitlement under the plan are transferred directly to an RPP in one lump-sum amount and

     (a)  the terms of the RPP provide for such a transfer, and

     (b)  the transfer is not at the employee's request; i.e., it is not in the employee's power to demand payment of the funds or roll the funds into another plan, the transfer would not be considered a taxable event.  Otherwise, to a person resident in Canada at the time of the transfer or payment, the Canadian income tax implications arising out of a transfer or payment out of a foreign pension plan are as follows:

1.     A foreign pension plan will be either a retirement compensation arrangement ("RCA") or an employee benefit plan ("EBP").  Where the plan is maintained primarily for the benefit of non-residents in respect of services rendered outside Canada, it will be an EBP except where it is a "resident's arrangement" described in subsection 207.6(5) of the Act.  Note, however, that on page 4 of the Appendix to a Department of Finance Information Release dated May 24, 1991 (copy enclosed), it is proposed that an employer will be able to elect not to have the rules in subsection 207.6(5) apply.

2.        Where the foreign pension plan is an EBP, an amount paid out of the plan to an individual who is resident in Canada is taxed as follows, regardless of whether the amount is transferred directly to an RPP on the individual's behalf or paid to the individual in one lump-sum amount or periodically in the form of a pension.

     (a)  To the extent that the amount is attributable to services rendered by an individual in a period other than a period throughout which the individual was not resident in Canada, the amount would be included in income under paragraph 6(1)(g) of the Act to the extent that it exceeds a return of amounts contributed to the plan by the individual.

     (b)  To the extent that the amount is attributable to services rendered by an individual in a period throughout which the individual was not resident in Canada, subparagraph 6(1)(g)(iii) of the Act will apply with the result that the amount would be included in income under subparagraph 56(1)(a)(i) of the Act.

3.     Where the amount is received out of a U.S. pension plan and is one described in 2(b) above, a deduction may be made by the recipient to the extent that the amount would not be taxable in the U.S. were the recipient a resident thereof.  This deduction is available by virtue of subparagraph 110(1)(f)(i) of the Act and Article XVIII of the Canada - U.S. Income Tax Convention (1980).  The deduction does not apply to an amount described in 2(a) above because the amount that would normally be deductible (i.e., the individual's own contributions) is already excluded from income under subparagraph 6(1)(g)(ii) of the Act.

4.     An amount taxed under paragraph 6(1)(g) of the Act as discussed in 2(a) above is not eligible for rollover to an RPP.

5.     To the extent that a deduction in respect thereof has not been made by the recipient under subparagraph 11O(l)(f)(i) of the Act as discussed in 3 above, an amount taxed under subparagraph 56(1)(a)(i) of the Act as discussed in 2(b) above may be rolled over to an RPP if it is received in the form of a lump-sum amount;  i.e., it is not received as part of a series of periodic payments.  A deduction with respect to such a rollover is available under paragraph 60(;) of the Act.  The rollover may be effected by transferring the lump-sum amount directly from the foreign plan to  the RPP, or by making the lump-sum payment to the individual and   the individual then contributing the amount to the RPP.

6.     Where the foreign pension plan is an RCA, an amount paid out of the plan to an individual who is resident in Canada would be included in the individual's income under either paragraph 56(1)(x), (y) or (z), depending upon the circumstances. An amount received out of an RCA may be rolled over to an RPP only where the amount represents a retiring allowance. The relevant deduction is available under paragraph 60(j.1) of the Act. An amount received out of a pension plan normally would not represent a retiring allowance.

7.      Since the amount would be paid by a foreign authority, there would be no withholding by Canada with respect to such payment. However, an amount could be withheld from the payment by the foreign authority. If there is such a withholding, the individual would be able to claim a foreign tax credit in respect thereof under section 126 of the Act. These comments are applicable to the situation described in each of paragraphs 3, 4 and 5 of your letter and would apply whether the plan is a U.K. or a U.S. pension plan. We are not aware of any procedure by which an amount properly withheld by a foreign authority could be retrieved and contributed to the RPP. Whether or not an amount was properly withheld is a matter to be resolved between the recipient and the foreign authority.

Amounts Paid out of a Registered Pension Plan

8.     Where an amount is paid out of an RPP to an individual who is not resident in Canada, the income tax implications are as follows:

(a)      Where the amount is paid to the non-resident in the form of a lump-sum amount, either by transferring the amount to a foreign pension plan or paying it directly to the individual, the amount is subject to a 25% Part XIII tax ("withholding tax") under paragraph 212(1)(h) of the Act, except to the extent that the amount may reasonably be regarded as attributable to services rendered by the  individual, to or in respect of whom the payment is made, in taxation years.

(i)       at no time which he was resident in Canada, and

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

     (b)  Where the amount is paid to a U.K. resident in the form  of a pension, the 25% withholding tax referred to in 8(a) above would not be applicable by virtue of part 1 of Article XVII of the Canada-U.K. Income Tax Convention (1978).

     (c)  Where the amount is paid to a U.S. resident in the form of a pension, the 25% withholding tax referred to in 8(a) above is reduced to 15% by virtue of part 2(a) of Article XVIII of the Canada-U.S. Income Tax Convention (1980).

9.     Whether or not the U.K. or U.S. tax authorities would allow a tax credit in respect of Canadian withholding tax is a matter to be resolved between the recipient and the U.K. or U.S. tax authorities.

The above comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of the enclosed Information Circular 70-6R2.  We trust however that they are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate