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.
Are contributions to a 401(k) plan taxed twice in Canada?
Employee contributions excluded from taxable receipts from the plan.
January 16, 1996
This is in reply to your letter dated October 31, 1995, wherein you expressed concerns with the Department's position that employee contributions to a 401(k) plan (the "Plan") in the U.S. are taxable at the time of contribution. You are of the view that this results in double taxation of the contributions because the eventual payments out of the Plan are taxable when received.
A Plan is a U.S. plan under which eligible employees can elect to have their employer contribute part of their before-tax pay to the Plan rather than receive the cash. The employee's gross earnings from employment include the amount withheld by the employer and contributed to the Plan. In general, a Plan is treated as a pension plan for Canadian income tax purposes but it is not and can not be a registered pension plan for the purposes of the Canadian Income Tax Act (the "Act"). Consequently, the employee is not entitled to deduct his or her contributions to a Plan and he or she is subject to tax in Canada on the gross income from employment and not on the net amount after the contributions to the Plan are withheld.
A Plan for a commuter who is a resident of Canada and who is employed in the U.S., if funded only by employee contributions, is considered to be pension plan for the purposes of the Act and the eventual distributions from the Plan will be considered to be superannuation or pension benefits for purposes of the Act. As such, distributions from the Plan will be included in the recipient's income for tax purposes in the taxation year in which they are received. However, should it be reasonable to consider that a portion of the amount received from the Plan is derived from contributions which have been taxed, the Department will accept a reasonable breakdown, based on the terms of the Plan, of the distribution between the taxable portion and the non-taxable portion.
A Plan that is funded by a combination of employee and employer contributions, while still a pension plan, will be subject to employee benefit plan rules of the Act. Pursuant to the provisions of the Act distributions from an employee benefit plan, less the portion based on the terms of the Plan that can reasonably be considered to be a return of employee contributions to the Plan, will be included in employment income of the recipient for income tax purposes.
In summary the Department has not changed its policy with respect to the taxation of employee contributions to a Plan and such contributions are not subjected to Canadian tax a second time.
We trust the above comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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