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.
Principal Issues:
Whether Canadian resident employee entitled to a deduction for 1991 contributions to a foreign pension plan.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
Foreign plan is either an employee benefit plan or a retirement compensation arrangement and there are no deductions for employee contributions to such plans.
February 17, 1994
MISSISSAUGA DISTRICT OFFICE HEAD OFFICE
J. Anderson, Director Rulings Directorate
(613) 957-8953
Attention: K. Vaiya
Appeals Division
940310
Contributions to 401(k) Plan
This is in reply to your memorandum of February 1, 1994, in which you ask whether the above-noted contributions by a resident working in Canada for a U.S. employer should be excluded from gross income for the 1991 taxation year. The employee's argument is that the amounts are taxable when received out of the 401(k) plan and, therefore, should be excluded from income in the year they are paid into the plan. The following comments relate to the situation where the employee is resident in Canada at the time the services are rendered and at the time the amounts are received out of the foreign plan.
LAW
A U.S. 401(k) plan is considered a pension plan for purposes of the Income Tax Act (the "Act"). Such a plan is either an "employee benefit plan" or a "retirement compensation arrangement" (both defined in subsection 248(1) of the Act). The Act provides no deduction for employee contributions to an employee benefit plan (EBP), or to a retirement compensation arrangement (RCA) the custodian of which is a non-resident.
When amounts are received out of the foreign pension plan, they are taxable in accordance with either paragraph 6(1)(g) (for an EBP) or 56(1)(x) (for an RCA) of the Act; an employee is not taxed on, or is permitted a deduction equal to, that portion representing a return of the amounts contributed by the employee. The income exclusion or deduction is contained in, respectively, subparagraph 6(1)(g)(ii) for employee benefit plans and paragraph 60(t) of the Act for retirement compensation arrangements.
With respect to contributions made in 1991, the rules in subsection 207.6(5) of the Act will cause such contributions to be deemed to have been made to an RCA, if the conditions therein are met. Amendments to this subsection were most recently announced by the Department of Finance on August 30, 1993, (December 18, 1992, with respect to subsections 6804(1) and (4) of the Income Tax Regulations) and will be applicable after October 6, 1986, when passed. The following is a discussion in general terms concerning the current and proposed law as it applies for 1991.
A. Current Law
Contributions (made in respect of services rendered by an employee who was resident in Canada at the time the services were rendered) to a foreign pension plan (which would be an RCA but for the exception in paragraph (l) of the definition) will not be considered to have been made to an RCA if the employee was a member of the foreign plan before he became resident in Canada and the employee has resided in Canada for less than five years. If this exception applies, the foreign pension plan will be considered an EBP for purposes of determining the tax consequences to the employee for the 1991 taxation year and with respect to receipt of amounts out of the plan attributable to contributions made in 1991.
B. Proposed Law
Under proposed subsections 207.6(5) and (5.1), the contributions will be subject to the RCA rules if made to a paragraph (l) plan and if the contributions may reasonably be considered to have been made in respect of services that were primarily rendered in Canada or were rendered in connection with a business carried on by the employer in Canada (or a combination of such services). The exemption for contributions made to a plan in respect of an employee who was a member of the plan before becoming resident in Canada and who has resided here less than five years still applies.
If the employee was not a member of the plan before becoming resident or has resided here for five or more years, then contributions to the foreign plan will be deemed to be "resident's contributions" within the meaning ascribed by subsection 207.6(5.1) of the Act, unless the contributions are prescribed under subsections 6804(1) and (4) of the Income Tax Regulations (the "Regulations").
Contributions made in 1991 by an employee and an employer to a foreign pension plan are prescribed if:
(a) the contribution is made to a "qualifying entity" - defined in subsection 6804(1) of the Regulations and will include a tax-exempt foreign pension plan.
(b) any employer who makes a contribution to the plan is a non-resident corporation, a partnership contributing in respect of services rendered outside Canada by non-resident employees, or a "foreign non-profit organization" (also defined in subsection 6804(1) of the Regulations).
(c) where a contributor employer is a corporation or partnership, no employee who benefits under the foreign plan is entitled to benefits accruing from the employer's contributions (or contributions from a person or body of persons not dealing at arm length with the employer) in the year to a registered pension plan or deferred profit sharing plan.
(d) contributions in the year for the benefit of employees resident in Canada are reasonable in relation to contributions benefiting non-resident employees.
(e) the foreign plan is not a pension plan the registration of which has been revoked under the Act.
If the contributions to the foreign plan are exempt from the RCA rules because of the five year residency exception or because they meet the prescribed conditions described in (a) through (e) above, the foreign plan will be considered an EBP for purposes of determining the tax consequences to the employee for the 1991 taxation year and in respect of amounts received out of the plan in respect of contributions made in that year.
We trust the foregoing comments are of assistance. If you have any questions concerning this matter, please contact Patricia Spice at (613) 952-9853.
for Director
Financial Industries Division
Rulings Directorate
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