3 December 1997 External T.I. 9715195 - FOREIGN PENSION 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:

Explanation how a foreign pension plan would affect a resident.

Position:

General description of contributions to a foreign pension plan.

Reasons:

ITA

						971519
XXXXXXXXXX				Franklyn S. Gillman, LL.L., C.A.

Attention: XXXXXXXXXX

December 3, 1997

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters dated June 6 and December 1, 1997 wherein you requested clarification as to the proper income tax treatment of contribution made by XXXXXXXXXX to the Fund for the benefit of certain of its employees who are canadian residents.

The situation described in your letter appears to relate to a proposed transaction. An actual proposed transaction should be the subject of an advance income tax ruling. Should this be the case, your query should take the form of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996 (copy enclosed). As expressed at paragraph 7 in the Information Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions. However, we are prepared to provide you with the following general comments.

A foreign pension plan includes a plan to which an employer, and sometimes the employee, make contributions and which is established to provide income after retirement and usually for life. Employer contributions to a foreign pension plan would normally be contributions to a retirement compensation arrangement ("RCA"). An RCA is defined in the Canadian Income Tax Act (the "Act") as "a plan or arrangement under which contributions ... are made by an employer or former employer of a taxpayer ... in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of office or employment of the taxpayer ... ". Paragraph (l) of the definition of RCA in subsection 248(1) of the Act excludes an arrangement maintained primarily for non-residents in respect of services rendered outside Canada and, as a consequence thereof, foreign pension plans are usually excluded from the RCA legislation by virtue of this provision. However, the application of subsection 207.6(5.1) of the Act may deem contributions to a foreign pension plan to be resident's contributions and subsection 207.6(5) of the Act deems these to be contributions to an RCA.

Subsection 207.6(5.1) of the Act defines the expression "resident's contribution" for the purpose of applying subsection 207.6(5) of the Act. The definition applies to contributions made to a foreign retirement plan that is excluded from being an RCA by virtue of paragraph (l) of the definition of RCA in subsection 248(1) of the Act. A resident's contribution includes a contribution that can reasonably be considered to have been made in respect of services rendered by an individual to an employer in a period throughout which the individual was resident in Canada and rendered services to the employer that were primarily services rendered in Canada or services rendered in connection with a business carried on by the employer in Canada or a combination of such services.

Subsection 207.6(5.1) of the Act specifically excludes from the definition of resident's contribution, a contribution made in respect of an employee who has been resident in Canada for less than five of the preceding six years provided the employee was a member of the foreign plan before becoming a Canadian resident, or became a plan member by the end of the calendar month following the month in which the employee became a resident of Canada. In addition, a prescribed contribution is excluded from the definition of resident's contribution. In general, a prescribed contribution is a contribution made after 1991 to a foreign plan where the employer elects to report pension adjustments in connection with the participation of the employees in the foreign plan and certain other conditions are satisfied.

Subsection 207.6(5) of the Act provides that where a resident's contribution has been made to a plan the following occurs:

a.the plan is deemed for purposes of the resident's contribution to be a separate plan known as a residents' arrangement;

b. the resident's arrangement is deemed to be an RCA; and

c. each person to whom a contribution is made under the residents' arrangement is deemed to be a custodian of the residents' arrangement.

The above deeming provisions bring a residents' arrangement within the application of the RCA provisions of the Act. All contributions to an RCA are subject to a 50% tax which is refundable when the funds are distributed to the employee. Sections 207.5 to 207.7 of the Act details the mechanism by which this process occurs. When amounts are received out of the foreign pension plan which is an RCA, they are taxable under the Act in accordance with 56(1)(x). There is also a deduction available under paragraph 60(t) of the Act for an amount received out of an RCA representing a return of the employee's contributions.

Should a foreign pension plan not come within the parameters of the RCA legislation, it would be viewed under the Act as an employee benefit plan ("EBP"). Interpretation Bulletin IT-502, "Employee Benefit Plans and Employee Trusts", published by Revenue Canada (copy enclosed) provides an explanation of EBPs and their operation. At paragraph 3 it states:

"Subject to the exclusions in 4 below, an employee benefit plan is any arrangement under which the employer or someone not dealing at arm's length with the employer makes contributions to another person (called a custodian) and under which one or more payments will be made to or for the benefit of employees, former employees or persons with whom the employees and former employees do not deal at arm's length (hereinafter collectively referred to as "EBP beneficiary or EBP beneficiaries"). An arrangement which provides only for payment or payments to be made in respect of benefits which are expressly excluded from income by reason of subparagraph 6(1)(a)(i) of the Act is not an employee benefit plan."

Paragraph 6 goes on to state:

"As a result of subparagraph 6(1)(a)(ii), no amount is required to be included in an employee's income in respect of any benefit received or enjoyed by the employee by reason of an employee benefit plan. Under paragraph 6(1)(g), however, all amounts received out of or under the plan or from the disposition of an interest in the plan constitute income from an office or employment to the recipient in the year received except to the extent that they represent one or more of the following amounts:

(a)a death benefit received upon or after the death of an employee in recognition of the employee's service in an office or employment before the deduction described in the definition of death benefit in subsection 248(1) (a death benefit however, is taxable under subparagraph 56(1)(a)(iii)),

(b)amounts which represent a return of the EBP beneficiary's own contributions, or in the case of a deceased EBP beneficiary, the refund of the deceased's contributions to an heir or a legal representative thereof (a return of contributions is discussed further in 15 below), or

(c)a superannuation or pension benefit which is attributable to services rendered by the person while not resident in Canada (payments of this type are taxable by virtue of subparagraph 56(1)(a)(i) in the hands of a resident)."

The IT further goes on at paragraph 7:

"All amounts received by the EBP beneficiaries out of the plan, except those described in 6(a),(b) and (c) above, constitute income from an office or employment to the EBP beneficiaries regardless of the nature (e.g. capital gains, dividends) of the amounts when received by the plan and regardless of the fact that such income may have previously been taxed in the custodian's hands."

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-6R3 written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,

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