3 March 1997 External T.I. 9640745 - 401(K), IRA TO RRSP

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:

1) Is a 401(k) plan an FRA? 2) Is income earned by FRA allocated to period of residency and non-residency?

Position:

1) No 2) No, period of residency only important for periods of pension entitlements

Reasons:

1) Only IRAs qualify as FRA 2) Income on capital is attributable to the residency at the time that capital contributed to the plan.

	              						964074
XXXXXXXXXX	                    				M.P. Sarazin

March 3, 1997

Dear Sir:

Re: Rollover of U.S. Pension Plan

This is in reply to your facsimile dated December 10, 1996, wherein you requested our comments with respect to the following three general questions.

Question #1

Is a U.S. 401(k) pension plan considered a "foreign retirement arrangement" ("FRA") for purposes of the Income Tax Act (the "Act")?

Comments

An FRA is defined in subsection 248(1) of the Act as a "prescribed plan or arrangement". Section 6803 of the Income Tax Regulations provides that an individual retirement account ("IRA") referred to in 408(a), (b), or (h) of the Internal Revenue Code of 1986 qualifies as an FRA for purposes of the Act. Consequently, a U.S. 401(k) pension plan is not considered an FRA for purposes of the Act. In fact, the Department is of the view that a U.S. 401(k) pension plan is a U.S. pension plan.

Question #2

Is investment income earned within an FRA considered to derive from contributions to the FRA and, where an employer has contributed to an FRA, is it necessary to trace the investment income on such contributions?

Comments

Pursuant to subparagraph 60(j)(ii) of the Act, a taxpayer may deduct certain amounts that are included in the taxpayer's income for the year where such amounts are transferred to an RRSP or RPP. One such amount is the amount determined under 60.01 of the Act, which provides that an amount received by a taxpayer from a FRA is an "eligible amount" if all of the following conditions are met:

(a) the amount must have been included in the taxpayer's income for the year received pursuant to clause 56(1)(a)(i)(C.1) of the Act;

(b) the amount cannot be part of a series of periodic payments. In other words, it has to be a lump-sum payment; and

(c) the amount must have been derived from contributions made to the IRA by either the taxpayer or the taxpayer's spouse or former spouse.

For the purposes of paragraph (c) above, investment income earned within an FRA is considered to derive from contributions to the FRA.

However, employer contributions to an FRA are not considered contributions made by the employee and, as such, the amount derived from such contributions can not be transferred to an RRSP. Therefore, it is necessary to determine the amount of investment income that is attributable to any employer contributions. Since it may be impossible to trace investment income to specific contributions, a reasonable allocation would be acceptable.

Question #3

Would investment income earned in a foreign pension plan while the taxpayer was resident in Canada with respect to contributions made by the taxpayer while not a resident in Canada be considered "attributable to services rendered by the taxpayer or former spouse of the taxpayer in a period throughout which that person was not resident in Canada"?

Comments

The pension benefits provided under a foreign pension plan would be attributable to the employment services provided by the taxpayer or the spouse or former spouse of the taxpayer to the employer. It is only the residence of the person providing the employment services to the employer that is relevant for purposes of determining the proportion of the lump-sum payment that is eligible for the deduction under subparagraph 60(j)(i) of the Act. Consequently, if all contributions to the foreign pension plan relate to periods of non-residency then the entire amount in the foreign pension plan would qualify even though some of the investment earnings relate to periods where the taxpayer was resident in Canada. However, if part of the contributions to the foreign pension plan relate to a period of non-residency and part to a period of residency then only the non-residency contributions plus related earnings (including investment earnings relating to periods where the taxpayer was resident in Canada) thereon will qualify for the deduction under subparagraph 60(j)(i) of the Act. In this situation, a reasonable allocation of the investment income between the non-residency contributions and the residency contributions would be acceptable.

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