18 April 1995 External T.I. 9433835 - FOREIGN PENSION 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.

Principal Issues:

Taxation of amounts out of a U.S. pension plan.

Position TAKEN:

Assuming recipients are taxable under Act, amount out of foreign plan is taxable under 6(1)(g), 56(1)(a)(i) or 56(1)(x), with exemption under 6(1)(g) or deduction under 60(t) for return of employee contributions or possible roll under 60(j), depending on whether contributions relate to years of service while resident in Canada or outside.

Reasons FOR POSITION TAKEN:

Routine.

		943383
XXXXXXXXXX		P. Spice

April 18, 1995

Dear Sir:

Re: XXXXXXXXXX - Pension Plan

This is in reply to your letters of November 26 and December 13, 1994, to the International Taxation Office which were forwarded to us by the Registered Plans Division. You ask our opinion concerning the Canadian income tax implications for employees of the XXXXXXXXXX who receive a pension out of the above-named U.S. pension plan. You indicate that the plan is a qualified plan under section 401(a) of the U.S. Internal Revenue Code.

Your letter refers to an actual fact situation related to both past and future transactions and events. The review of such situations is the responsibility of the tax services offices or, in the case of non-residents, the International Taxation Office, the office to which you originally addressed your query. However, to assist you we have provided the following general comments that may or may not apply to any particular participant. We will forward a copy of this reply to the International Taxation Office for their future reference should you wish to further discuss the matter with them. For members of the XXXXXXXXXX pension plan who are residents of Canada, we suggest that you give them a copy of this letter which they can then provide to their tax services office when discussing their particular tax situation.

For purposes of this discussion, we are assuming that the employees are subject to tax under the Income Tax Act (Canada) (the "Act"). The determination of whether an individual is liable to Canadian income tax is a separate one which depends on the residency of the employee at the time an amount is received and the source of the amount. We do not have sufficient information concerning this matter to make a determination.

A U.S. 401(a) plan is considered a pension plan for purposes of the Act. Such a plan is either an "employee benefit plan" (EBP) or, with respect to some employees where contributions are made by an employer after December 31, 1987, a "retirement compensation arrangement" (RCA), both of which are defined in the Act.

When amounts are received out of the foreign pension plan, they are taxable under the Act in accordance with paragraph 6(1)(g) (for an EBP where the contributions relate to service while the employee resided in Canada), 56(1)(a) (for an EBP where the contributions relate to service while the employee resided outside Canada) or 56(1)(x) (for an RCA).

If an employee has also made contributions to the pension plan there may be a tax exemption under subparagraph 6(1)(g)((ii) of the Act for that part of an amount received out of an EBP which represents a return of the employee's contributions. This exemption only applies to contributions made to the plan which relate to the employee's employment while resident in Canada. There is also a deduction available under paragraph 60(t) of the Act for an amount received out of an RCA representing a return of the employee's contributions.

Where contributions were made which relate to employment while the employee was resident outside Canada, there is no tax relief for amounts representing a return of the employee's contributions. However, where a lump sum received out of the pension plan is taxed in accordance with subparagraph 56(1)(a)(i) of the Act, there may be a deduction permitted under paragraph 60(j) of the Act relating to the whole or part of the lump sum which is transferred by the employee to a registered retirement savings plan or to a registered pension plan. The tax deductible transfer is not available for amounts which are received on a periodic basis out of the pension plan nor is it available for amounts for which the recipient has taken a deduction under subparagraph 110(1)(f)(i) of the Act. This latter deduction can be taken where the recipient is taxable in another jurisdiction, such as the United States, on the same amount, and the tax treaty between Canada and the other jurisdiction provides that the recipient is exempt from tax in Canada.

There are a number of Income Tax Act provisions, both current and proposed, which serve to determine whether amounts out of a foreign pension plan will be considered amounts received out of an EBP or RCA. However, these are complex, and it is not possible to elaborate on them without further information concerning the specific recipient of the pension. To determine the income tax implications, if any, under the Internal Revenue Code, you should contact the Internal Revenue Service. Should a recipient of a pension amount be taxable under the laws of both the United States and Canada, there may be relief from double taxation under the Canada-United States Income Tax Convention, 1980 - see reference to subparagraph 110(1)(f)(i) of the Act above.

We trust this information is helpful and apologize for the delay in responding to your enquiry.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Ms Carol Abbass

Problem Resolution Program
International Taxation Office