8 September 1995 External T.I. 9515045 - RCA, SURPLUS, CONTRIBUTION, PA

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:

Would the use of pension surplus to fund employer contributions be considered employer contributions for purposes of sections 6804(4) and (5) of the Regulations?

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

No contribution for purposes of 207.6(5.1) of the Act. However, after 1991, a pension adjustment would have to be reported for pension benefits accrued in each year.

		951504
XXXXXXXXXX	M.P. Sarazin

Attention: XXXXXXXXXX

September 8, 1995

Dear Sirs:

Re: Canadian Resident Participates in a U.S. Qualified Defined Benefit Pension Plan

This is in reply to your letter dated June 5, 1995 wherein you requested our comments regarding the views you have expressed on the application of subsections 207.6(5) and (5.1) of the Income Tax Act (the "Act"), proposed section 6804 of the Income Tax Regulations (the "Regulations") and proposed subsection 8308.1(2) of the Regulations in the following situation.

A U.S. corporation sponsors a U.S. defined benefit pension plan for its employees. It currently employs, through a Canadian affiliate company, an individual who has been a citizen and resident of Canada throughout his period of employment. The Canadian affiliate company does not sponsor a registered pension plan. Employer contributions to the U.S. pension plan were made in respect of this individual during the years 1986 through 1988 and no contributions have been made subsequent to 1988 because the plan is in a surplus position.

You are of the view that:

(a)any contributions to the U.S. qualified pension plan in respect of the Canadian individual in any year subsequent to 1991 will be considered a "resident's contribution" within the meaning assigned by subsection 207.6(5.1) of the Act. Since no contributions have been made subsequent to 1988, there was no tax payable under subsection 207.7(1) of the Act;

(b)any contributions to the U.S. qualified pension plan in respect of the Canadian individual in any year prior to 1992 will be a "prescribed contribution" under subsection 6804(4) of the Regulations. Since no contributions have been made subsequent to 1988 and the contributions made prior to 1989 were prescribed contributions, there was no tax payable under subsection 207.7(1) of the Act; and

(c)because all of the conditions of subsection 8308.1(2) are satisfied, a pension credit would have to be reported for the Canadian individual for each year subsequent to 1991.

Comments

It appears that your request for an opinion involves both specific taxpayers and completed transactions. Since the responsibility for determining the tax consequences arising from completed transactions rests with tax services offices, the appropriate tax services office may, upon disclosure of all of the relevant facts, be able to assist you in clarifying the tax consequences pertaining thereto. Although we cannot comment directly on your situation, we are able to provide you with the following general comments.

The retirement compensation arrangement ("RCA") provisions in the Act became effective October 8, 1986. However, plans or arrangements in existence at that date were only subjected to the RCA provisions of the Act as of January 1, 1988. Therefore, the time that the employee became a member of the plan or arrangement would be the deciding factor in determining which date is applicable.

With regards to the pre-1992 contributions, we can agree that no election is necessary or available to prescribe them not to be a resident's contribution. However, they must meet all of the conditions in subsection 6804(4) of the Regulations and from the information provided, we cannot determine whether they have met these conditions. If the pre-1992 contributions are, in fact, resident's contributions, then there is a deemed RCA pursuant to subsection 207.6(5) of the Act with respect to those contributions and the income earned with respect to those amounts. Consequently, even though there are no contributions after 1988, there could still be Part XI.3 tax exigible on the earnings on those contributions after 1988.

After 1991, where there are no contributions made to the foreign plan, and the other conditions in subsection 8308.1(2) of the Regulations are met, the employee will have a pension credit and a pension adjustment should be reported. If in subsequent years, contributions are made that are resident's contributions, the condition in subparagraph 8308.1(2)(b)(iv) will not be met and there will be no pension credit.

We trust the above comments will be of assistance to you.

Yours truly,

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