24 July 1995 Internal T.I. 9512947 - 401(K) PLANS US PENSIONS RCAS TREATMENT IN CANADA

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: Treatment of 401(k) plans

Position TAKEN: Routine explanation

Reasons FOR POSITION: New law

			July 24, 1995

WINDSOR TAX SERVICES OFFICE HEADQUARTERS
J. Ciurysek W.C. Harding
Client Assistance Division (613) 957-8953
7-951294

Treatment of 401(k) Plans

This is in reply to your letter of April 13, 1995 in respect of the above noted topic.

In your letter you described 4 examples of cases typical of those you often deal with, together with your understanding of the law as it applies to them. You asked for our comments.

Attached is a summary of the examples and our comments on the application to them of the Retirement Compensation Arrangement ("RCA") rules and draft section 8308.2 of the Income Tax Regulations (the " Regulations"). The following is an explanation of these provisions.

1. In relation to the examples, in general, an RCA is defined in subsection 248(1) of the Income Tax Act (the "Act") as an arrangement under which an employer or former employer of an employee, or a person not dealing at arms length with the employer, has made a contribution to a custodian to fund retirement benefits to be provided to the employee. However, the provision does not include an arrangement described in paragraph (l) of the definition, that is an arrangement (other than an athlete's plan) maintained primarily for the benefit of non- residents in respect of services rendered outside of Canada.

2. 401(k) plans are generally maintained for the benefit of non- resident employees employed outside of Canada. However, this may not be true in all cases since such a plan could be arranged primarily for Canadian residents. Accordingly it can not be assumed that all 401(k) plans will be excluded from the definition of an RCA by paragraph (l) of the definition.

3. If a 401(k) plan is not an RCA by virtue of the definition in subsection 248(1) of the Act, it will be deemed to be an RCA under the provisions of subsection 207.6(5) of the Act in respect of any "resident's contributions" made to the plan.

4. A "resident's contribution" is defined in subsection 207.6(5.1) of the Act as:

any part of a contribution made under an arrangement at a time when the arrangement would have been an RCA but for paragraph (l) of the RCA definition in subsection 248(1) of the Act as

a. was not a "prescribed contribution"; and

b. was made in respect of:

(1) a period throughout which the employee was resident in Canada and

- the employee's services were provided primarily in Canada for the employer or in connection with a business carried on in Canada by the employer; and

(2) a period at the beginning of which

- the employee had always been a resident of Canada before the period started; or

- where the employee had been a non-resident at any ime before the period started and had become a member of the plan before the end of the month following the month the employee became a resident, the employee had been resident for 60 of the 72 preceding months.

5. A contribution may be a "prescribed contribution" in accordance with draft Regulation 6804(4), (5) or (6) as is applicable. In general, under the draft regulations, a contribution will be a prescribed contribution if an employer is eligible to elect and has elected to calculate Pension Adjustments (PAs) in respect of the contribution rather than treat the amount as a contribution to an RCA.

6. Draft Regulations 8308.1 and 8308.2 pertain to two distinct situations.

7. Draft Regulation 8308.1 deals with the calculation of a PA of an employee where the employer has elected to treat a contribution to an RCA as a prescribed contribution as discussed in paragraph 5 above. Accordingly it can only apply to situations where services are provided in a period as described under 4(b) above (in general, services performed in Canada by a resident employee).

8. Draft Regulation 8308.2 deals with the calculation of a PA of an employee where a resident employee has provided services outside of Canada which are not rendered primarily in connection with an employer's business carried on in Canada. Accordingly Regulation 8308.2 does not apply with respect to a contribution that would otherwise be a resident's contribution.

We note that you also referred to the provisions of subsection 207.6(6) of the Act. Please note that these provisions do not pertain to foreign plans but to certain government sponsored arrangements.

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

c.c.: Rick Owen

Facts Is the 401(k) plan an RCA in Is there a respect of the employee? Prescribed Amount under Regulation 8308.2?

A.-TP has always No. The plan is not defined Yes.

been resident in as an RCA because of the
Canada paragraph (l) exclusion and
-Employer is non- provided the services are not
resident performed in respect to a
-TP employed in resident's arrangement because
USA the services are not performed
-TP and employer in Canada
contribute to a
401(k) plan

B.-TP became a No - for the same reasons

resident provided in A.

-Employer is non-
-TP employed in
USA
-TP and employer
contribute to a
401(k) plan

C.-TP became a Yes - Either immediately or No. The resident in eventually. services are

January 1992 The plan is not defined as performed in -Employer is non- an RCA because of the Canada and
resident The plan is not defined Regulation
-TP employed in as an RCA because of the 8308.2 only
Canada paragraph (1) exclusion; applies to
-TP and employer however: services
contribute to a i. - if the employee becomes performed
401(k) plan a member after the end of outside of
February 1992, it will be a Canada
resident's arrangement
from that time on; and
ii. - if the employee became
a member of the plan by the
end of February 1992, it will
be a resident's arrangement
once the employee has been a
resident for 60 of the 72
calendar months following

January 1992.

D.-TP became a Same as in C. However, since No. The

resident in (C.ii)applies, the plan services are
in January 1989 became a resident's performed in
and has remained arrangement on February 1, Canada
a resident at all 1994 since the employee
times. had then been resident
-Employers is non- throughout the 60
resident preceding months
-TP employed in
Canada
-TP and employer
contribute to a
401(k) plan before
and after becoming
resident in Canada

endnotes

1. It is presumed no elections have been made to treat contributions as prescribed contributions.

2. It is presumed that the 401(k) plan is a trusteed arrangement in all cases and would meet the paragraph (1) exception for RCAs.