3 March 1997 External T.I. 9641365 - 401(K) TRANSFER TO IRA THEN 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:

Can amounts in a 401(k) plan that is not eligible for 60(j)(i) deduction be transferred to IRA in order to qualify for 60(j)(ii)?

Position:

Probably not, would consider application of GAAR

Reasons:

Taxpayer would rely on administrative position to circumvent actual provision disallowing deduction for transfer.

		                                         964136
XXXXXXXXXX                                  M.P. Sarazin

Attention: XXXXXXXXXX

March 3, 1997

Dear Sirs:

Re: U.S. Pension Rollover

This is in reply to your facsimile dated December 16, 1996, wherein you requested our comments as to whether a Canadian resident (the "Taxpayer") employed by a Taxable Canadian corporation and a related U.S. corporation may transfer funds from a U.S. 401(k) pension plan to a Canadian registered pension plan (the "RPP").

Comments

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Although we cannot provide a specific answer to your query, we offer the following general comments which are not binding on the Department.

The Department is of the view that a U.S. 401(k) plan is a U.S. pension plan. In order to be eligible for transfer to a registered retirement savings plan ("RRSP") or an RPP under the provisions of subparagraph 60(j)(i) of the Income Tax Act (the "Act"), an amount in a U.S. 401(k) pension plan would have to be attributable to services rendered by a taxpayer or a spouse or former spouse of the taxpayer in a period throughout which that person was not resident in Canada. Where this condition is not satisfied, the amount in the U.S. 401(k) would not be eligible for transfer to an RRSP or RPP under subparagraph 60(j)(i) of the Act.

A foreign retirement arrangement ("FRA") is defined in subsection 248(1) of the Act as a "prescribed plan or arrangement". Section 6803 of the 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.

Pursuant to subparagraph 60(j)(ii) of the Act, a taxpayer may be able to 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 for the year 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.

With respect to (c) above, an IRA lump sum payment that was derived from an amount transferred to the IRA from a U.S. pension plan at the direction of the taxpayer, or the taxpayer's spouse or former spouse satisfies the requirement that the lump sum must have been derived from contributions made to the IRA by such a person.

Where a series of transactions is designed to circumvent a specific provision in the Act, the Department will consider the application of the general anti-avoidance rules ("GAAR") found in subsection 245(2) of the Act. The Department's general views with respect to the application of GAAR are found in Information Circular 88-2 dated October 21, 1988 and the Supplement thereto dated July 13, 1990.

In the case where an amount held in a U.S. 401(k) pension plan is not eligible for transfer to an RRSP or RPP under subparagraph 60(j)(i) of the Act and a taxpayer transfers the amount to an IRA for the sole purpose of meeting the requirement described in (c) above thereby qualifying for transfer to an RRSP or RPP under subparagraph 60(j)(ii) of the Act, we would refer you to paragraph 22 of IC 88-2 wherein the Department discusses an avoidance transaction designed specifically to circumvent the application of another provision within the Act. In that particular case, the Department concluded that GAAR would be applied. The determination of whether GAAR would apply to your particular proposed transactions would require a review of all of the facts.

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