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.
Principal Issues: Is the custodian of a foreign pension plan, part of which is a residents' arrangement deemed to be an RCA under the Act, required to file T4A-RCAs when paying distributions out of the deemed RCA?
Position: Yes.
Reasons: The deemed RCA is subject to the rules applicable to RCAs under the Act, including paragraph 153(1)(q) of the Act and subsection 200(1) of the Regulations.
July 18, 2012
XXXXXXXXXX Tax Services Office HEADQUARTERS
Income Tax Rulings
Directorate
Attention : XXXXXXXXXX Mélanie Beaulieu
(613) 957-9226
2012-044068
XXXXXXXXXX – Reporting Requirements of a Deemed RCA
We are writing in response to your facsimile dated March 15, 2012 wherein you requested our views with respect to the reporting requirements applicable to the custodian of a foreign pension plan, part of which is deemed to be a retirement compensation arrangement (“RCA”) under the Income Tax Act (the “Act”). Unless otherwise noted, all statutory references herein are references to the Act.
Our understanding of the relevant facts is as follows:
Facts
XXXXXXXXXX(the “Employer”) is based in the United States (the “U.S.”) and carries on activities in the U. S. and Canada. The Employer sponsors the XXXXXXXXXX (the “Plan”), which is a “foreign plan” within the meaning of section 8308.1 of the Income Tax Regulations (the “Regulations”). We understand that a Trust Committee, comprised of XXXXXXXXXX senior officers of the Employer, administers the Plan and that contributions to the Plan are deposited in a bank account. The bank is operating solely on instructions from the Trust Committee. It is not clear whether the Trust Committee, the bank, or another entity is the custodian of the Plan for the purposes of the Act. (footnote 1) We note that this question can only be decided based on a review of all relevant documentation. For the purposes of this letter, such a determination is not necessary and we will simply refer to the “Custodian” of the Plan. We understand that the Plan is maintained primarily for the benefit of non-residents of Canada in respect of services rendered outside Canada, as contemplated by paragraph (l) of the definition of RCA in subsection 248(1).
We understand that there are approximately XXXXXXXXXX active members of the Plan who are Canadian residents and who render services as employees of the Employer that are primarily services rendered in Canada (the “Canadian Employees”). From XXXXXXXXXX (footnote 2) to XXXXXXXXXX inclusive, the Employer did not make any contributions to the Plan due to an actuarial surplus. (footnote 3) We also understand that the Plan was still in a surplus position during the XXXXXXXXXX calendar years, but that during these years the Employer made certain voluntary contributions to the Plan with respect to the Canadian Employees. (footnote 4) These contributions were “resident’s contributions” within the meaning of subsection 207.6(5.1), but both the Employer and the Custodian mistakenly did not consider them as such. On the basis of this mistake, neither the Employer nor the Trust Committee reported, withheld nor remitted any amount to the Canada Revenue Agency (the “CRA”) with respect to the Plan. The Employer and the Custodian are now of the view that the above-mentioned voluntary contributions with respect to Canadian Employees were “resident’s contributions”, with the consequence that subsection 207.6(5) applied and created a “deemed RCA”, as explained in further details in our comments below.
XXXXXXXXXX
We understand from the correspondence that you provided us that XXXXXXXXXX an issue has arisen as to whether the Custodian was subject to any withholding and reporting requirements with respect to distributions out of the deemed RCA during the XXXXXXXXXX calendar years. Form T737-RCAs as well as form T3-RCAs have been filed by the Employer and the Custodian XXXXXXXXXX. However, no T4A-RCAs have been filed. The Custodian, through its representative, expressed the view that T4A-RCA reporting is not required in the circumstances.
Representative’s Arguments
The representative’s argument may be summarized as follows:
1) the Plan does not have sufficient nexus to Canada to be subject to the requirements of the Act and the Regulations;
2) pursuant to paragraph 207.6(5)a), the Plan is deemed to be a residents’ arrangement in respect of its application to all “resident’s contributions” made under the Plan and investment income thereon but distributions out of the plan are not captured by the deeming rule;
3) subsection 207.7(4) sets out the provisions of the ITA that are applicable to a plan that is a deemed RCA under Part XI.3; section 153 is absent from the list of applicable provisions and therefore subsection 153(1) and the related reporting requirements do not apply to such a plan; and
4) compared to the administrative burden for the Plan, there is no benefit or advantage to be derived by requiring T4A-RCA compliance at this time.
A foreign pension plan includes a foreign plan to which an employer makes contributions and which is established to provide income to employees after retirement. For the purposes of the Act, employer contributions to a foreign pension plan would normally be contributions to an RCA (or, if not, to an employee benefit plan (“EBP”), as indicated below). An RCA is defined in subsection 248(1) 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) excludes a plan or arrangement maintained primarily for non-residents in respect of services rendered outside Canada. Consequently, foreign pension plans are usually excluded from the RCA legislation by virtue of this provision. However, where a resident’s contribution is made to a foreign plan, subsection 207.6(5) deems:
a) the portion of the plan comprised of resident’s contributions and any earnings derived thereon to be a separate plan, referred to as a residents’ arrangement;
b) the residents’ arrangement to be an RCA; and
c) each person or partnership to which such a contribution is made to be a custodian of the RCA
Accordingly, the rules in the Act that relate to RCAs will apply to the residents’ arrangement that is deemed to be an RCA.
Subsection 207.6(5.1) defines the expression “resident’s contribution” for the purpose of applying subsection 207.6(5). The definition applies to contributions made to a foreign pension plan that is excluded from being an RCA by virtue of paragraph (l) of the definition of RCA in subsection 248(1). In general, a contribution to a foreign plan will be a resident’s contribution to the extent that it is made in respect of employment services rendered by a Canadian resident primarily in Canada, or in connection with a business carried on by the employer in Canada.
The definition of a resident’s contribution in subsection 207.6(5.1) excludes a prescribed contribution pursuant to section 6804 of the Regulations. Generally, a contribution to a foreign pension plan made after 1994 will be a prescribed contribution if the employer has made an election in accordance with subsection 6804(2) and the conditions of subsection 6804(6) are satisfied. As a result of a contribution being a prescribed contribution, paragraph 8308.1(2)(b) of the Regulations will generally apply, such that the employer will have to report pension adjustments in connection with the participation of the employees in the foreign pension plan.
Amongst the rules that relate to RCAs, paragraph 56(1)(x) requires a taxpayer to include in income any amount received out of or under an RCA in the taxation year, by either the taxpayer or another person, when the amount relates to the taxpayer’s office or employment. Paragraph 56(1)(z) requires a taxpayer to include an amount received out of or under an RCA when the distribution relates to another person’s employment and has not been included in the income of that other person under paragraph 56(1)(x). Paragraph 153(1)(q) and the Regulations in turn provide for a mechanism under which the custodian of an RCA is required to withhold an amount, on account of the payee’s tax, from distribution payments out of or under an RCA, and remit such amount to the Receiver General.
Hence, pursuant to paragraph 153(1)(q) of the Act, every person who, at any time in a taxation year, pays an amount as a distribution to one or more persons out of or under an RCA shall deduct, withhold and remit an amount in accordance with prescribed rules.
Pursuant to paragraph (b.1) of the definition “remuneration” in subsection 100(1) of the Regulations, an amount of a distribution out of or under an RCA is remuneration for purposes of Part I of and Schedule I to the Regulations. Subsection 100(1) of the Regulations defines an “employer” for these purposes as any person paying remuneration, and an “employee” as any person receiving it. Thus, the custodian of an RCA is an employer for the purpose of determining the withholding rate applicable to distributions out of the Plan, and Canadian recipients of distributions out of or under an RCA are employees for that purpose.
Regarding the reporting requirements, subsection 200(1) of the Regulations generally provides that every person who makes a payment described in subsection 153(1) shall make an information return in prescribed form in respect of the payment. In the context of distributions out of or under an RCA, the prescribed form is a T4A-RCA information return. This is consistent with the information provided in T4041 – Retirement Compensation Arrangements Guide, which indicates, at page 15, that a “custodian who makes a distribution out of an RCA trust has to file a T4A-RCA information return”.
These rules apply to all RCAs, including the portion of a foreign plan which is a residents’ arrangement deemed to be an RCA pursuant to subsection 207.6(5).
Applying the above to the facts described in the correspondence you provided us, it appears that the voluntary contributions that the Employer made to the Plan with respect to the Canadian Employees during the XXXXXXXXXX calendar year were resident’s contributions within the meaning of subsection 207.6(5.1). Pursuant to subsection 207.6(5), a portion of the Plan, comprised of resident’s contributions and all property derived from those contributions, is a separate plan (a residents’ arrangement), which is deemed to be an RCA for the purposes of all the rules in the Act that relate to RCAs.
It follows that, by virtue of paragraph 153(1)(q), the Custodian, when paying distributions out of or under the deemed RCA to Canadian recipients, is required to withhold income tax on such distributions and is also required to file T4A-RCA information returns in accordance with subsection 200(1) of the Regulations. These information returns are relevant in order to determine the liability under the Act of Canadian recipients, who, as indicated above, are required under paragraph 56(1)(x) or (z), as the case may be, to include in income any amount received out of the deemed RCA.
The issue that then arises is whether and to what extent, the amounts paid out of the Plan to Canadian recipients during the XXXXXXXXXX years may be considered as distributions paid out of the portion of the Plan which is deemed to be an RCA pursuant to subsection 207.6(5). As previously indicated, it is only the portion of the Plan which is comprised of resident’s contributions – Employer’s contributions made during the XXXXXXXXXX calendar years with respect to the Canadian Employees – and property derived from those contributions that is deemed to be an RCA. It follows that it is only distributions out of that portion of the Plan which are distributions paid out of a deemed RCA subject to the foregoing rules.
If, as we understand, Employer’s contributions remitted to the Custodian during the XXXXXXXXXX calendar years were made to finance pension benefits of Canadian Employees rendering services as employees of the Employer during these years (see note 4), it cannot be considered that payments out of the Plan to former Canadian Employees who were already retired during these years were distributions out of the portion of the Plan that is deemed to be an RCA. Distributions paid to the former Canadian Employees during these years most likely came from previous Employer contributions (which we assume were not resident’s contributions) and surplus therefrom. In other words, such distributions most likely did not come from a residents’ arrangement deemed to be an RCA. Rather, these distributions probably come from the remaining portion of the Plan which is an EBP for the purposes of the Act, as indicated below. It is only when the Canadian Employees with respect to which the Employer Contributions were paid during the XXXXXXXXXX calendar years actually start to receive benefits out of the Plan that distributions paid out of the deemed RCA will start to be made. It is possible that some of these Canadian Employees actually started to receive benefits during the XXXXXXXXXX years. This would most likely be the case of only a small number of these Canadian Employees.
XXXXXXXXXX
As for the amounts paid by the Custodian to Canadian recipients out of the rest of the Plan, which were not paid out of the deemed RCA, they do not have to be reported on T4A-RCA information returns. This does not mean, however, that the Custodian has no withholding or reporting obligations under the Act regarding such amounts. For the purposes of the Act, the rest of the Plan is considered to be an EBP. Distributions out of an EBP are generally taxable under paragraph 6(1)(g) when received by a Canadian recipient and, as such, are subject to withholding taxes pursuant to paragraph 153(1)(a). These amounts have to be reported on T4 information returns.
First, the withholding and reporting requirements explained above apply although the Plan is a resident of the U.S. and is operated entirely in the U.S. and although all Plan assets are maintained in the U.S. Moreover, the fact that U.S. withholding and reporting may be required in connection with the distributions made by the Plan to Canadian recipients does not modify the applicable requirements under the Act. Subsection 153(1) applies to every person paying an amount described in the subsection, whether or not the payer is a Canadian resident and whether or not the payer is also subject to withholding and reporting requirements pursuant to a foreign law. By analogy, we note that a non-resident employer which has hired a Canadian resident individual to render services only in the U.S. has an obligation to withhold the Canadian payroll deductions pursuant to paragraph 153(1)(a) (regardless of whether or not the non-resident employer directly or indirectly carries on business in Canada). The non-resident employer is not relieved of its obligation to withhold Canadian payroll deductions by the fact that it has withheld U.S. payroll deductions from the wages it pays its Canadian resident employee. (However, the Canadian resident employee may be able to obtain a “letter of authority” from the CRA to authorize the non-resident employer to reduce the Canadian deductions at source to take into account the foreign tax credit.)
As for the argument that distributions out of the Plan are not captured by the deeming rule in paragraph 207.6(5)(a), it ignores paragraph 207.6(5)(b), which deems the residents’ arrangement to be an RCA. As indicated before, we are of the view that, as a result, all the rules in the Act that relate to RCAs (including the rules applicable to distributions out of an RCA) then apply to the portion of the Plan that is a residents’ arrangement deemed to be an RCA. It follows that all amounts actually paid out of the deemed RCA are subject to paragraph 153(1)(q) as indicated above.
We also disagree with the argument based on subsection 207.7(4). This provision applies not only to residents’ arrangements deemed to be RCAs pursuant to subsection 207.6(5) but also to all RCAs. This provision generally ensures that a proper mechanism is provided regarding the assessment process of Part XI.3 tax and regarding objections to and appeals from such assessments. Besides, specific rules are provided in subsection 153(1) in connection with RCAs regarding amounts that have to be withheld and remitted by a payer to the Receiver General on account of the payee’s tax. Paragraph 153(1)(p) relates to contributions under an RCA, paragraph 153(1)(q) relates to distributions out of or under an RCA, and paragraph 153(1)(r) relates to amounts paid on account of the purchase price of an interest in an RCA. If a reference to section 153 in subsection 207.7(4) was necessary to render these provisions applicable in connection to RCAs, none of these paragraphs would ever have any application. XXXXXXXXXX.
As for the administrative burden invoked by the representative, it is not an issue relating to the interpretation of the requirements of the Act and Regulations. Rather, this argument raises the issue of whether administrative relief is appropriate in the circumstances. As such, we are of the view that this issue should be dealt with by your Division. XXXXXXXXXX.
Please note that the present letter does not address all the provisions of the Act that are applicable to the Plan. We generally limited our comments to the rules creating the deemed RCA as well as the withholding and reporting obligations of the Custodian of such deemed RCA when making distributions out of it, which is the issue raised in the correspondence you provided to us. Should you require further assistance regarding other aspects of this file, please do not hesitate to contact us.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 952-1361. In such cases, a copy will be sent to you for delivery to the taxpayer.
Yours truly,
Louise J. Roy, CPA, CGA
Manager
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 XXXXXXXXXX
2 We do not have the information regarding years prior to XXXXXXXXXX. Considering the amounts paid out of the Plan to Canadian recipients during the XXXXXXXXXX years, we assume that the Employer made contributions to the Plan before XXXXXXXXXX with respect to Canadian Employees. For the purposes of this letter, we will assume that such contributions, as the case may be, were prescribed contributions pursuant to subsection 6804(4) of the Regulations.
3 Based on section XXXXXXXXXX of the Plan which states that “XXXXXXXXXX”, we understand that the Employer did not have an absolute right to the surplus.
4 Because the Plan was in a surplus position, we understand that these contributions were made to finance pension benefits to be received by the Canadian Employees rendering services as employees of the Employer during these years, and not to cover liabilities of the Plan with respect to former Canadian Employees who were receiving benefits out of the Plan during these years.
5 XXXXXXXXXX
6 XXXXXXXXXX
7 XXXXXXXXXX
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