22 January 1997 External T.I. 9642235 - HONG KONG RETIREMENT PAYMENT

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:

Explanation of tax consequences to Canadian resident of payments received out of foreign plan.

Position:

General description of receipt of pension or retiring allowance from foreign plan.

Reasons: N/A

XXXXXXXXXX 964223

Attention: XXXXXXXXXX

January 22, 1997

Re: Receipt of Hong Kong Retirement Payment

This is in reply to your letter of December 1, 1996, in which you ask whether a payment to be received by your client is subject to income tax in Canada. Your client has been and will be a resident of Canada at all relevant times.

Your question relates to a proposed payment and a technical interpretation concerning the tax consequences can only be provided in the context of an advance income tax ruling. We may provide, however, the following general comments which are not binding on the Department.

In order to determine whether there is an income inclusion under the Act on receipt of a payment, the nature of the payment must be determined. We are unable to confirm from the information you have provided whether the payment in question would be a pension or superannuation payment or a retiring allowance or possibly some other kind of employment benefit.

You make reference to clause 56(1)(a)(i)(C.1) of the Income Tax Act (the "Act") and the definition of "foreign retirement arrangement" in subsection 248(1) of the Act. Please note that a "foreign retirement arrangement" is defined to mean a plan or arrangement as prescribed by the Income Tax Regulations (the "Regulations"). Section 6803 of the Regulations prescribes those plans or arrangements to which subsections 408(a), (b) or (h) of the United States Internal Revenue Code applies. Therefore, an arrangement or plan established under Hong Kong law is not a "foreign retirement arrangement" under the Act.

If the foreign pension plan is a funded arrangement, the following discusses the potential tax consequences to the employee.

Generally, and with respect to employer contributions made before January 1, 1988, and earnings thereon, payments out of a foreign pension plan are considered payments out of an "employee benefit plan" (defined in subsection 248(1) of the Act) and where the benefits are attributable to services rendered while the employee was resident in Canada, the payments are taxable when received as employment income in accordance with paragraph 6(1)(g) of the Act. The amount representing a return of the employee's own contributions is not subject to income tax in Canada.

After December 31, 1987, employer contributions to a foreign pension plan in respect of a Canadian resident employee are considered to be made to a "retirement compensation arrangement" as provided in subsections 207.6(5) and (5.1) of the Act but only where the employee primarily rendered services in Canada or in connection with a business carried on by the employer in Canada. Where the services were primarily rendered outside Canada or in connection with a business carried on outside Canada, the plan or arrangement is considered an "employee benefit plan" as discussed above.

If the plan or arrangement provides for a pension but it is not funded by the employer, the amount is taxable when received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

Finally, a funded plan established to provide a retiring allowance on termination of employment is an "employee benefit plan" or "retirement compensation arrangement" depending on the circumstances as discussed above with reference to foreign pension plans. Where the retiring allowance is not a funded arrangement, the amount is taxed when received by the employee in accordance with subparagraph 56(1)(a)(ii) of the Act. An amount received as a retiring allowance out of an employee benefit plan and taxed under paragraph 6(1)(g) of the Act is not eligible for the paragraph 60(j.1) deduction where a payment is made to a registered retirement savings plan; however, the paragraph 60(j.1) deduction is available with respect to all or a part of an amount of a retiring allowance taxed under subparagraph 56(1)(a)(ii) of the Act and transferred to a registered retirement savings plan.

We trust our comments will be of assistance to you. Please note that if your client was not a resident of Canada while the retirement benefits accrued, or was resident in Canada and the post-86 benefits relate to services rendered in Canada or to a business carried on in Canada, the foregoing comments are not applicable.

Yours truly,

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