10 November 1999 External T.I. 9921445 - SAR/SEP IRAS & REG. 8308.2 PRESCRIBED AMOUNTS

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 U.S. IRA "SAR/SEP" plan (IR Code 408(k)) is subject to Reg 8308.1 Pension Adjustment or 8308.2 RRSP Reduction

Position: Subject to 8308.2

Reasons: Services rendered in U.S.. Would be an RCA but for par (l) of definition of RCA

XXXXXXXXXX 992144
S. E. Thomson
Attention: XXXXXXXXXX

November 10, 1999

Dear XXXXXXXXXX:

Re: SAR/SEP Plans and Pension Adjustments

This is in reply to your letter of June 16, 1999, which was forwarded to us by Jeffrey Boxer, Registered Plans Division. We also acknowledge subsequent telephone calls (Thomson/XXXXXXXXXX), and correspondence from you.

You have outlined a hypothetical situation where a Canadian resident is employed by a U.S. firm, and his services are rendered in the U.S.. (You did not mention it, but we presume that the U.S. firm is not carrying on a business in Canada.) The employee and the employer participate in a SAR/SEP plan (described below). You have asked us to confirm that the SAR/SEP plan would not be considered to be a pension plan, and accordingly, would not be considered in the calculation of a pension adjustment.

Simplified Employee Pension (SEP)

IRS Publication 590 describes a Simplified Employee Pension as a written arrangement (a plan) that allows an employer to make contributions toward his or her own (if a self-employed individual), and toward employees' retirements, without becoming involved in more complex retirement plans. The contributions are made to IRAs (SEP-IRAs) of the participants in the plans. Under a SEP, IRAs are set up for, at a minimum, each qualifying employee. An employer who signs a SEP agreement is not required to make any contribution to the SEP-IRAs that are set up. But, if the employer does make contributions, the contributions must be based on a written allocation formula and must not discriminate in favor of highly compensated employees.

An employer cannot prohibit withdrawals from a SEP-IRA. Also, an employer cannot condition contributions to a SEP-IRA on the keeping of any part of them in the account. Distributions from a SEP-IRA are subject to IRA rules.

Salary Reduction Arrangement (SAR)

IRS Publication 590 explains that a SEP may include a "salary reduction arrangement". Under the arrangement, the employee can elect to have the employer contribute part of the employee's pay to the employee's SEP-IRA, with certain restrictions and limits. Under the Internal Revenue Code the U.S. tax on the contribution is deferred and tax is only currently payable on the remaining portion of the employee's pay.

Regulation 8308.1

A "pension adjustment" is defined in paragraph 8301(1)(b) of the Income Tax Regulations (the "Regulations") to include an individual's pension credit for the year with respect to the employer under a foreign plan, determined under section 8308.1. Paragraph 8308.1(2)(a) of the Regulations states that the pension credit of an individual for a calendar year with respect to an employer under a foreign plan is nil where paragraph 8308.1(2)(b) does not apply. Paragraph 8308.1(2)(b) applies where the services were rendered in a period throughout which the individual was resident in Canada and the services that were rendered to the employer were primarily rendered in Canada, or in connection with a business carried on by the employer in Canada. Since your situation does not involve services rendered in Canada, and is not in connection with a business carried on by the employer in Canada, paragraph 8308.1(2)(b) does not apply and the employee's pension credit with respect to that employer (and therefore his pension adjustment) is nil.

Regulation 8308.2

For services rendered outside of Canada, however, section 8308.2 of the Regulations sets out a "prescribed amount" for purposes of the "RRSP deduction limit" (as set out in subsection 146(1) of the Income Tax Act (the "Act")). The prescribed amount applies where an individual, resident in Canada, rendered services to an employer, and the individual became entitled to benefits under a pension plan that is a "foreign plan" as defined in subsection 8308.1(1) of the Regulations.

A foreign plan in subsection 8308.1(1) of the Regulations is defined as a plan or arrangement that would, but for paragraph (l) of the definition "retirement compensation arrangement" in subsection 248(1) of the Act, be a retirement compensation arrangement.

A retirement compensation arrangement ("RCA") is defined in subsection 248(1) of the Act to be a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person (a "custodian") 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 an office or employment of the taxpayer.

Paragraph (l) of the definition of "retirement compensation arrangement" specifically exempts from the RCA definition plans or arrangements that are maintained primarily for the benefit of non-residents in respect of services rendered outside of Canada. A SEP plan as described in the IRS publication would be maintained primarily for the benefit of non-residents in respect of services rendered outside of Canada (that is, the plan is utilized by U.S. employers primarily to benefit their U.S. resident employees). As such, the SEP plan will not be an RCA because of paragraph (l), but it will be a pension plan that is a foreign plan as defined in subsection 8308.1(1) of the Regulations, and benefits accruing thereunder will give rise to a prescribed amount under section 8308.2 of the Regulations for purposes of the RRSP deduction limit.

Calculation of Prescribed Amount

The calculation of the prescribed amount is determined under section 8308.2 of the Regulations. (Please refer to the enclosed copy of Guide T4084 "Pension Adjustment Guide" on page 16 (1998 revision) for more information in this regard). For years 1997 to 2004, the RRSP contribution room is reduced by the lesser of:

• the money purchase limit for the previous year; and
• 10% of the resident compensation for the previous year.

For example, the money purchase limit for 1999 is $13,500, and if we say that the resident compensation for 1999 was Cdn $75,000, the prescribed amount will be the lesser of:

• $13,500 and
• 10 % of $75,000 = $7,500.

The employee must reduce his RRSP contribution room for 2000 by $7,500. This is done by reporting $7,500 at line 206 (pension adjustment) on his 2000 personal income tax return. The employer is not required to complete a tax reporting slip for the employee.

We would like to emphasize that the prescribed amount applies to Canadian residents employed outside of Canada by non-resident employers who do not carry on business in Canada. In other situations, these rules do not apply.

We trust that we have been of assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate