13 February 1997 Internal T.I. 9642337 - 401(K) PLAN

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:

Whether amounts contributed to 401K plan are employee or employer contributions.

Position:

Employee contributions.

Reasons:

Employee who elects in advance not to receive portion of his remuneration is subject to tax on that amount by virtue of 56(2).

							February 13, 1997

	HALIFAX TAXATION SERVICES OFFICE	HEADQUARTERS
D. Gibson					P. Spice
	Director					(613) 957-8953
	Attention:  Joe Gillis
							964233

XXXXXXXXXX 401(k) Plan

This is in reply to your memorandum received December 30, 1996, in which you ask us to confirm whether it is our view that amounts elected to be contributed to the above-noted plan by employees should be included as employment income on the T4 supplementary. It has been the employer's practice to report the employee's remuneration net of the amount contributed to the 401(k) plan.

Attached to your memorandum was a copy of a letter of July 31, 1996, from the employer's accounting representatives in response to your proposal to include in the employee's income the amount of the contributions. It is the representative's contention that the contribution is not income to the employee but represents an employer contribution because the employee gives up the right to receive the amount in advance of earning it.

This will serve to confirm that in our view the amount that the employee elects to contribute to a 401(k) plan is employment income to the employee and taxable as such. Until it is earned it cannot be contributed to the plan; once earned it is taxable income to the employee.

All amounts which the employee elects to have deducted from his or her pay and remitted to some other person (e.g., an employee benefit plan, a registered pension plan, a group registered retirement savings plan, a registered charity) constitute employment income and are taxable as such by virtue of subsection 56(2) of the Income Tax Act. See, for example, The Queen v. Hoffman (1985) 2 CTC 347 and The Queen v. Fairey 91 DTC 5230.

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