9 April 1992 Income Tax Severed Letter 9208557 - Employee Savings 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.

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: EMPLOYEE SAVINGS PLAN SECTION: 6(1)(g), 6(14),
56(10)]

April 9, 1992
Source Deductions Division Financial Industries
Division
D.S. Delorey
957-8953
Attention: Eric Hammond
D.O./T.C. Support
Services Section
7-920855

Employee Savings Plans

This is in reply to your memorandum of March 17, 1992, concerning the taxation of amounts paid out of an employee savings plan and the amount to withhold under subsection 153(1) of the Income Tax Act (the "Act") from those payments.

Your memorandum relates to correspondence that your Division and the International Tax Programs Directorate has had with the XXX In the correspondence, that Directorate and your Division state that the Department considers an employee savings plan to be an employee benefit plan "EBP") for the purposes of the Act. You have therefore expressed the view that payments out of an employee savings plan are taxed under paragraph 6(1)(g) of the Act as employment income when received, that the payments are subject to graduated rates of withholding and are subject to reporting as "other income" on forms T4A Supplementary and T4A Summary, whether the recipient is a resident or non-resident of Canada. That is, you consider the comments in Policy and Systems Branch Letter 82-9 concerning the taxation of amounts received out of an EBP to be applicable to all employee savings plans On the other hand, XXX seems to be of the view that payments out of an employee savings plan with respect to interest, dividends or capital gains retain their identity and, as a consequence, are not subject to withholding under subsection 153(1) of the Act and would be required to be included in a beneficiary's income when allocated under the plan.

Our Comments

We would first like to mention that the EBP provisions of the Act may not apply to an employee savings plan. That is, depending on its terms and characteristics, an employee savings plan may be any one of the following:

• (a) An employee savings plan may be a salary deferral arrangement ("SDA") or a retirement compensation arrangement ("RCA"). In this regard, we refer you to the second paragraph under the Application heading in the Special Release to IT-502.
• (b) Although an SDA and an RCA are mutually exclusive by virtue of the basic nature of their respective purposes, an employee savings plan may be, in combination, partly an EBP, SDA and RCA. In such cases, the provisions of subsections 6(14) and 56(10) of the Act may have application.
• (c) An employee savings plan that is otherwise an EBP and that meets the definition of an SDA (or an RCA) will retain its identity as an EBP for the period of time before the SDA rules (or the RCA rules if applicable) came into effect.
• (d) An employee savings plan may be none of the above. That is, it may be the type of plan discussed in the fourth sentence of paragraph 32 of IT-502 and in paragraph 5 on page 2 of P & S Branch Letter 82-9. As indicated in No. 1 on page 3 of that Letter and in No. 1 on page 10 of IT-502, the contributions to such a plan will be included in the employee's income for the year in which they are made. With respect to any growth in the plan on those contributions, the trust rules in section 104 will normally apply with the result that designations under subsections 104(19) and 104(21) are possible. However, these designations are mostly irrelevant for a non-resident beneficiary as the designation under 104(19) does not apply for the purposes of Part XIII and the designation under subsection 104(21) is not available where the beneficiary is non-resident unless the trust is a mutual fund trust. A designation with respect to interest income of the trust is no longer available because of the repeal of former subsection 104(26).

To the extent that amounts received out of an employee savings plan are considered to be received out of an EBP, we agree that the participants will be taxed under paragraph 6(1)(g) of the Act on all such amounts when received, constructively or otherwise, except where the exclusion in any of subparagraphs 6(1)(g)(i), (ii) or (iii) applies. Amounts taxed under paragraph 6(1)(g) represent employment income and, accordingly, paragraph 153(1)(a) of the Act is the applicable withholding provision. By virtue of paragraph 2(3)(a) and subparagraph 115(1)(a)(i) of the Act, these comments apply also to a non-resident recipient to the extent that the amounts received relate to employment duties performed in Canada.

With respect XXX view that certain types of income out of an employee savings plan retain their identity, he may have in mind the type of plan discussed in (d) above. Also, we note that in the letter dated January 16, 1992, from the International Tax Programs Directorate to XXX the tax implications inherent in an employee profit sharing plan are discussed. As noted therein, it is possible for certain amounts allocated under such a plan to retain their identity. It may be that XXX has misunderstood the comments in that letter and assumes that the comments applicable to employee profit sharing plans apply also to employee savings plans.

Please advise if you need further assistance in this regard.

for Director
Financial Industries Division
Rulings Directorate