11 June 1997 External T.I. 9641425 - UK PERSONAL PENSION SCHEMES

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. Can amounts received from U.K. personal pension schemes be transferred to an RRSP?

2. What other tax implications are there with respect to these types of plans?

Position:

1. Amounts can be transferred if they are taxable under 56(1)(a).

2. There are a number of taxing provisions that may have application with respect to a Canadian resident who has one of these plans. Only general information could be provided at this time.

Reasons:

1. Recent court decisions have helped to distinguish pension plans from retirement savings plans. We have adopted the general tests applied by the courts to make our determinations and will apply the same test to specific schemes on a case by case basis.

2. The number of provisions that may apply to any specific situation is broad and there could be current taxation of some retirement savings in these plans. Only general comments could be provided at this time.

XXXXXXXXXX 964142

Attention: XXXXXXXXXX

June 11, 1997

Dear Sirs:

Re: Transfer of amounts to an RRSP from a United Kingdom Personal Pension Scheme (PPS)

This is in reply to your letter of June 17, 1996, addressed to the Ottawa Tax Services Office. As you were advised by that office in their letter of December 13, 1996, your enquiry was referred to us for reply. We also acknowledge your letter of February 26, 1997, and our telephone conversation (XXXXXXXXXX - Harding) of February 10, 1997. We would again like to apologize for the delay in responding to your request.

We have considered your submissions on the taxation in Canada of amounts received by a Canadian resident out of or under a United Kingdom personal pension scheme ("PPS") and the ability to transfer these amounts to a registered retirement savings plans ("RRSP"). On the basis of that analysis we have concluded that an amount received from a PPS may be transferred to an RRSP and deducted in computing income for a year in accordance with the provisions of paragraph 60(j) of the Income Tax Act (the "Act") when the amount received is included in the recipient's income for the year under the provisions of paragraph 56(1)(a) of the Act. However, an amount received out of a PPS will only be included in the recipient's income under paragraph 56(1)(a) of the Act if it is a superannuation or pension benefit or is an amount received out of a "foreign retirement arrangement".

A "foreign retirement arrangement" is defined in subsection 248(1) of the Act and is a plan or arrangement prescribed by section 6803 of the Income Tax Regulations. However, to date, only plans commonly known as "Individual Retirement Accounts or IRAs, that are described in subsections 408(a), (b) or (h) of the United States' Internal Revenue Code have been prescribed. In consequence, amounts received out of a United Kingdom PPS would not be included under this provision.

Amounts received out of a PPS scheme will also not fall within the provisions of paragraph 56(1)(a) of the Act as superannuation or pension benefits except to the extent the PPS can be considered to be a superannuation or pension plan. In our opinion, this will only occur where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee or in some cases, where amounts have been contributed by a government. To explain, the courts have generally found that a plan will not be a superannuation or pension plan where only the beneficiary of the plan has made contributions. The courts have in particular, frequently cited the 4th definition of pension as set out in the Shorter Oxford English Dictionary as support for their decisions. This definition provides that a pension is:

"4. An annuity or other periodical payment made, esp. by a government, a company, or an employer of labour, in consideration of past services."

Because of these decisions we have accepted the general position that amounts received out of a PPS where only employee contributions have been made, are not superannuation or pension benefits that are included in income in accordance with subparagraph 56(1)(a)(i) of the Act and can not be transferred to an RRSP under the provisions of paragraph 60(j) of the Act.

Because your submission was made with respect to the treatment of amounts received out of any form of PPS it would not be appropriate for us to provide any specific comments at this time. However, should you wish to submit a request for rulings with respect to a proposed transfer of a particular PPS we would be pleased to consider your request.

We would also like to draw to your attention the fact that in addition to the provisions noted above, various other provisions of the Act may have application to a UK PPS held by a resident of Canada. In particular, if the PPS is a trust, it will likely be subject to the provisions of section 94 of the Act whether it is a pension plan or a retirement savings plan. Furthermore, if the plan is not a trust, but is held in the form of an annuity or deposit, the various rules pertaining to the annual reporting of income from property may apply.

In the situation you are reviewing you have indicated that the PPS is now funded through an insurance company and that on maturity the holding will be converted into a lump sum withdrawal and an annuity. However, you have not provided details of how the accumulated funds are presently held and we do not know whether your client is or will be a resident of Canada at any particular time. Accordingly we can not provide any meaningful opinions on the taxability of any of the funds. As a general comment, we would suggest that the holders of these types of plans should review their circumstances and determine what their current reporting obligations may be. If further assistance is required, the Department would be pleased to discuss any particular situations on a case by case basis.

As you noted above, a holder of a PPS must convert all or a portion of the accumulated funds into an annuity which is, generally, payable for life. It is again a question of fact whether amounts received in respect of such an annuity will be pension or income annuity for purposes of the Act. As a general rule, subsection 254 of the Act would be applicable to such a determination so that amounts received from an annuity purchased under the terms of a pension plan would be treated as pension income. Transfers of lump sum payments of these pensions could be made to an RRSP as provided under paragraph 60(j) of the Act.

With respect to application of the Article 17 of the Canada U.K. Income Tax Convention, taxation of the amounts by both the U.K. and Canada will also depend on the nature of the payments being received. Paragraph 3 of the article provides that only periodic payments made out of pensions and retirement plans will be treated as pensions for purposes of paragraph 1 of the provision. Paragraph 4 provides that only fixed periodic payments under annuity contracts will be treated as annuities for purposes of paragraph 2 of the article. However, paragraph 4 also provides that the term does not include a pension or any payment made under a superannuation, pension or retirement plan in settlement of all future rights under such a plan. It should also be noted that for the purposes of these provisions we have not as yet determined if an amount paid under the terms of an annuity purchased with funds accumulated in a PPS would be considered to be amounts paid under a superannuation, pension or retirement scheme.

We trust these comments will be of assistance to you.

Yours truly,

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