28 September 1994 External T.I. 9410515 - EMPLOYEE BENEFIT 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.

		5-941051
XXXXXXXXXX	M.D. Gervais

March 31, 2016

Dear Sir:

Re: Employee Benefit Plans - 401(k) plans
Distributions to a Canadian resident

This is in reply to your letter of April 15, 1994, wherein you requested our opinion on the tax treatment of amounts of money received out of a United States 401(k) plan by a Canadian resident employee in the following situation.

A resident of the United States commenced employment with a U.S. company on January 1, 1990. On January 1, 1991 he became a resident of Canada, continuing his employment with the U.S. company. While employed by the U.S. company, he contributed to a United States 401(k) plan from January 1, 1990 to April 30, 1994. On April 30, 1994, the employee ceased employment and received a distribution from the plan. He commenced a new employment with another U.S. company on May 1, 1994, which does not have any 401(k) plan.

The employer contributed $ 1 for each $ 3 employee contribution. Employee participation and contribution amount was optional for the employee.

You ask that we confirm the following points:

- A 401(k) plan is a retirement plan \ Employee Benefit Plan;

- Employee contributions are not deductible in Canada;

-Contributions and investment income re pre-Canadian residency, and employee contributions during Canadian residency are deducted to arrive at the amount of disposition proceeds includible in income;

- Canada excludes from taxable income the amount of a U.S. pension excluded from U.S. taxable income. A 100% IRA rollover of a 401(k) distribution results in no taxable amount in U.S., and the Canadian taxable amount would also be 0;

Comments

In your letter, you outline what appears to be an actual fact situation related to transactions and events which have taken place and to identifiable taxpayers. The review of such situations generally is the responsibility of the District Taxation Offices and it is our practice not to provide specific opinions on factual situations otherwise than in the context of advance income tax rulings in accordance with paragraph 21 of Information Circular 70-6R2. In any event, a request cannot be considered for a ruling when the transactions are completed. Nevertheless, we are prepared to provide the following general comments which we hope will be of assistance to you.

A U.S. 401 (k) plan is generally considered a pension plan for the purposes of the Income Tax Act (the "Act"). Such a plan is also generally considered to meet the definition of an "Employee Benefit Plan" in subsection 248(1) of the Act for the purpose of determining the tax consequences to the employee.

The Act provides no deduction for employees' contributions to Employee Benefit Plans.

Pension payments received out of an Employee Benefit Plan attributable to services rendered in a period throughout which the employee-recipient is a resident of Canada must be included in his income under paragraph 6(1)(g) of the Act. However, an employee is not taxed on the portion of the pension payments representing a return of the amounts contributed pursuant to subparagraph 6(1)(g)(ii) of the Act or on the benefits attributable to services rendered while a non-resident. The benefits attributable to services rendered in a period throughout which the employee-recipient was not a resident of Canada, must be included in his income under subparagraph 56(1)(a)(i) of the Act. Thus, all amounts distributed, save employee contributions, are taxable under paragraphs 6(1)(g) and 56(1)(a) of the Act.

Where a Canadian resident is permitted under the U.S. Internal Revenue Code, to roll tax free, an amount received from a U.S. pension plan to an IRA in the United States, a deduction will be permitted in Canada pursuant to paragraph 110(1)(f) of the Act to recognize the tax referral permitted in the U.S. and the application of paragraph 1 of article XVIII of the Canada-U.S. Income Tax Convention (1980). Where the taxation of a lump sum distributed from a pension plan and transferred into an IRA has been deferred under paragraph 1 of article XVIII of the Convention, any payment received out of the IRA will be received as a pension benefit and included in computing the taxpayer's income under subparagraph 56(1)(a)(i) of the Act.

Whether the Internal Revenue Code allows a partial or total rollover is not a Canadian tax issue on which we can give you an opinion. As for the 3 cases you submitted for validity, we regret to inform you that we do not offer such a service.

The above comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Rulings Directorate
Reorganizations and Foreign Division
Policy and Legislation Branch