10 March 1992 Income Tax Severed Letter 9203857 - U.S. 401(k) plans, employee benefit plan, retirement compensation arrangement

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: U.S. 401(K) PLANS Section(s): REG 6802(e), 248(1) - EBP, 248(1) - RCA, 60(j)]

March 10, 1992

Source Deductions Division Financial Industries
Division
P. Spice
957-8953
Eric Hammond
Policy and Legislation Officer
D.O./T.C. Support Services Section
7-920385

U.S. 401(k) Plans
Source Deductions Memorandum of 10/12/90

We are writing in reply to your memorandum of February 4, 1992 (a copy is enclosed for the purpose of referencing your file numbers), in which you ask whether your division's position as outlined in the above-noted memorandum is still accurate.

Your memorandum was based partly on comments contained in a Rulings memorandum of July 27, 1990. However, The Department of Finance has since announced proposed changes to the legislation affecting retirement compensation arrangements (RCA's) which are foreign pension plans and, therefore, the comments in the Rulings memorandum are no longer totally accurate.

Specifically, new paragraph 6802(e) of the Income Tax Act Regulations prescribes certain foreign pension plans which would otherwise be RCA's and excludes them from the definition of an RCA contained in subsection 248(1). (We will assume for purposes of this discussion that the subject employer funded 401(k) plan satisfies the four conditions set out in paragraph 6802(e) of the Regulations.) This exclusion automatically applies for contributions made to the foreign pension plan after December 31, 1987 and before 1992. For the 1992 and subsequent taxation years, a sponsor of a foreign plan must elect to report a PA with respect to Canadian employees and have the contributions be exempt from the RCA rules, otherwise the RCA rules will apply. The rules with respect to the election were announced by the Department of Finance in releases dated May 24, 1991, and February 14, 1992.

As a consequence of the exemption from the RCA rules for the 1988 through 1991 taxation years, foreign pension plans will be considered to be employee benefit plans (EBP's), and if an election is made for the 1992 and subsequent taxation years, will continue to be treated as EBP's, If no election is made, the foreign pension plan will be considered an RCA with respect to contributions made after December 31, 1991, and our comments in the July 27, 1990 memorandum concerning post-December 1987 contributions should be applied.

A 401(k) plan is considered to be a pension plan, whether it is employee funded or employer funded. This position is set out in (7) of ASG-89-6 on page 8 as follows: “The Department considers that a 401(k) plan is a U.S. pension plan”. The fact that it is employer funded and, therefore, an EBP or RCA for purposes of the Income Tax Act does not prevent it from also being characterized as a pension plan.

To explain further, paragraph 56(1)(a) of the Act lists benefits under an EBP or RCA as being superannuation or pension benefits. If EBP or RCA benefits could not be pension benefits, there would be no need to except them from tax under paragraph 56(1)(a). The rollover under paragraph 60(j) of the Act is not available for lump sum EBP benefits (unless related to employment when the taxpayer was a non-resident) or lump sum RCA benefits because they do not qualify under paragraph 60(j), i.e. although they may be pension benefits, they are not pension benefits “included in computing the income of the taxpayer by reason of subparagraph 56(1)(a)(i)”.

The comments contained in paragraph 9 of IT-499R, therefore, apply equally to 401(k) plans as to any other foreign pension plan.

We trust the foregoing explanation is satisfactory.

for Director
Financial Industries Division
Rulings Directorate