16 April 1997 External T.I. 9705645 - ESOP, IRA, 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 an amount be transferred from a U.S. employee share purchase plan to an IRA then to an RRSP?

Position:

Question of Fact

Reasons:

Certain conditions have to be met and there were insufficient details.

	                         				  970564
XXXXXXXXXX		                                    M.P. Sarazin

Attention: XXXXXXXXXX

April 16, 1997

Dear Sirs:

Re: Canadian Residents Involved in U.S. ESOP

This is in reply to your letter dated February 18, 1997, wherein you requested an interpretation and ruling with respect to the taxation of amounts held in a U.S. Employee Share Ownership Plan ("ESOP") on behalf of Canadian resident employees where the employer proposes to transfer, subject to an advance income tax ruling from the U.S. Internal Revenue Service, the assets in the ESOP to each employee's

Individual Retirement Account ("IRA"). The Canadian resident employees would like to know whether the amount that will be transferred to his or her IRA may then be transferred, tax-free, to his or her registered retirement savings plan ("RRSP").

Comments

It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following comments.

The nature of a payment made out of an ESOP cannot be determined without reviewing the terms of the particular plan. Consequently, we are unable to provide any comments of a general nature concerning the transfer of amounts held in the ESOP to the IRAs.

The Income Tax Act (the "Act") and the Internal Revenue Code of 1986 of the United States do not provide for the tax-free rollover of lump-sum amounts from a retirement plan in one country to a retirement plan in the other country. A lump-sum payment out of an IRA to a Canadian resident may be subject to U.S. withholding and penalty taxes.

IRAs established pursuant to subsection 408(a), (b) or (h) of the Internal Revenue Code of 1986 are prescribed to be "foreign retirement arrangements" ("FRA") for purposes of the Act. A taxpayer is required to include all amounts received out of or under a FRA as a superannuation or pension benefit (whether lump-sum or periodic payment) in his or her income under the provisions of clause 56(1)(a)(i)(C.1) of the Act. The amount of the lump-sum payment to be included in the recipient's income is the gross amount, before U.S. withholding and penalty taxes, paid out of the IRA.

Pursuant to 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 a registered pension plan ("RPP"). One such amount for the year is the amount determined under section 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, the Department has opined that an IRA lump sum payment that was derived from an amount transferred to the IRA from a U.S. 401(k) pension plan or from another IRA at the direction of the taxpayer, or the taxpayer's spouse or former spouse, will satisfy the requirement that the lump sum must have been derived from contributions made to the IRA by such a person. However, the Department has never been asked to consider whether a transfer from an ESOP to an IRA would be considered a contribution to the IRA by the taxpayer or the taxpayer's spouse or former spouse. In any case, the determination of whether a transfer from an ESOP to an IRA would satisfy the condition in (c) above can only be made in the context of a request for an advance income tax ruling where all of the relevant facts are disclosed.

The taxes, other than penalty taxes, withheld by the administrator of the IRA is considered to be non-business taxes paid to the United States. Consequently, a taxpayer may be entitled to claim a foreign tax credit with respect to the U.S. withholding taxes deducted from any lump-sum withdrawal from an IRA. The foreign tax credit is generally computed as the lesser of the foreign taxes paid and a proportion of the Canadian taxes paid. The proportion is the taxpayer's foreign income divided by the taxpayer's total adjusted income. We note that, in determining the proportion, the foreign income is not reduced by the amount of the deduction under paragraph 60(j) of the Act. The enclosed Interpretation Bulletin IT-270R2 will provide you with the Department's general views on the computation of the foreign tax credit.

In the event that a taxpayer is not able to claim a foreign tax credit for the full amount of U.S. withholding taxes, the taxpayer may be allowed to claim a deduction under subsection 20(12) of the Act for an amount equal to the amount by which the U.S. withholding taxes exceed the foreign tax credit claimed. We are also enclosing a copy of IT-506 which provides the Department's general views with respect to the deductibility of foreign income taxes.

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

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