17 November 1995 External T.I. 9525965 - CONTRIBUTIONS TO A U.S. 401(K) 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:

Whether Canadian resident employee and his employer entitled to deduction for contributions to a 401(k) plan.

Position:

Plan considered an EBP; no for employee and yes for employer.

Reasons:

No provision in the Act for deduction for employee; for employer 18(10) where custodian non-resident to the extent contribution made in respect of services by an employee where employee resident in Canada no more than 60 months, member of plan before becoming resident of Canada or before the end of the month following the month in which the employee became a resident.

	 	5-952596
XXXXXXXXXX	M. Shea-DesRosiers

November 17, 1995

Re: Contributions to a U.S. 401(k) plan

This is in reply to your facsimile of October 2, 1995 concerning the tax implications of contributions to a United States 401(k) plan by both the employer and the employee.

Written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

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" ("EBP") or a "retirement compensation arrangement" ("RCA") as both terms are defined in subsection 248(1) of the Act.

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 plan such as a U.S. 401(k) plan, are subject to the RCA rules if made at a time that the plan would be an RCA but for the exception in paragraph (l) of the RCA definition and the contributions can 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) as provided in subparagraph 207.6(5.1)(b)(i) of the Act.

However, contributions made in respect of an employee who has been resident of Canada for less than five years are excluded if the employee was a member of a foreign plan before becoming a Canadian resident or became a member of the plan before the end of the calendar month following the month in which the employee became a resident. Where this exception applies, the foreign pension plan will be considered an EBP for purposes of determining the tax consequences to the employer and the employee.

It is to be noted that the Act provides no deduction for employee contributions to an RCA the custodian of which is a non-resident.

Paragraph 18(1)(o) of the Act prohibits the deduction of employer contributions to EBPs. Subsection 18(10) of the Act exempts such contributions from this prohibition where the custodian of the EBP is a non-resident and the contributions are made in respect of services rendered during the first 60 months of an employee becoming a resident of Canada and the employee was a member of the plan before becoming a Canadian resident or became a member of the plan before the end of the calendar month following the month in which the employee became a resident. Employer contributions will be deductible for the first 60 months after the employee becomes a Canadian resident.

Since the Act does not provide any deduction for employee contributions to an EBP, the employee will be subject to tax in Canada on his gross income from employment not the net amount after the contributions are withheld.

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