4 October 2011 External T.I. 2010-0388731E5 - RRSP Deduction Limit-Participation in Foreign 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.

Principal Issues: Can a Canadian resident individual who renders employment services to her U.S. employer both inside and outside Canada and participates in the employer's US Pension Plan determine the reduction to her RRSP deduction limit by prorating (i) the pension credit determined under section 8308.1 of the Regulations, and (ii) the prescribed amount determined under section 8308.2 of the Regulations, based on the percentage of time the Employee rendered services to the Employer inside and outside Canada

Position: No.

Reasons: Where the benefits relate to services rendered by the individual primarily in Canada or in connection with a business carried on by the employer in Canada, a pension credit is determined under section 8308.1 of the Regulations. Where the benefits are in respect of services rendered by the individual outside of Canada and unrelated to a business carried on by the employer in Canada, the individual must calculate the amount prescribed under section 8308.2 of the Regulations. The calculations are mutually exclusive.

XXXXXXXXXX 				2010-038873
					Jason R. Ward
October 4, 2011

Dear XXXXXXXXXX :

Re: RRSP Deduction Limit - Canadian Resident Participating in a U.S. Pension Plan

This is in response to your letter of November 26, 2010, concerning the calculation of the RRSP deduction limit of a Canadian resident individual (the "Employee") who renders employment services to her U.S. employer (the "Employer") both inside and outside of Canada and participates in a U.S. pension plan (the "U.S. Plan") maintained by the Employer.

In particular, you enquire whether there are any provisions in the Income Tax Act (the "Act") or the Income Tax Regulations (the "Regulations") which would allow the Employee in this situation to determine her RRSP deduction limit for a particular taxation year in part by prorating (i) the pension credit determined under section 8308.1 of the Regulations, and (ii) the prescribed amount determined under section 8308.2 of the Regulations, based on the percentage of time the Employee rendered services to the Employer inside and outside of Canada.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments which may be of assistance.

Sections 8308.1 and 8308.2 of the Regulations provide, respectively, for the calculation of a pension credit or a prescribed amount in respect of an employee's participation in a "foreign plan". A foreign plan, as defined in subsection 8308.1(1) of the Regulations, is a plan or arrangement that would be a retirement compensation arrangement ("RCA"), if the exclusion in paragraph (l) of the RCA definition in subsection 248(1) of the Act were ignored. Essentially, a foreign plan is a plan (determined without regard to subsection 207.6(5) of the Act, which is discussed below) that would be an RCA if it were not a plan that was maintained primarily for non-residents and in respect of services rendered outside of Canada. It will be a question of fact whether any particular foreign pension plan in which an individual is participating is a foreign plan and therefore subject to the application of sections 8308.1 or 8308.2 of the Regulations and the resulting reduction of the individual's RRSP deduction limit.

Subsection 8308.1(2) of the Regulations generally requires that a pension credit be calculated for a Canadian resident individual for a calendar year where the individual becomes entitled in the year to receive benefits under a foreign plan in respect of employment services rendered to an employer primarily in Canada or in connection with a business carried on by the employer in Canada. The pension credit forms part of the individual's pension adjustment ("PA") for the calendar year in respect of the employer, and consequently will reduce the employee's RRSP deduction limit for the following taxation year. An employer is required to report an employee's PA for a calendar year to both the Minister of National Revenue and the employee, on or before the last day of February in the immediately following calendar year.

The pension credit under subsection 8308.1(2) of the Regulations is generally the lesser of; (i) the money purchase limit for the year minus the PA offset for the year ($600), and (ii) 18% of the individual's resident compensation from the employer for the year minus the PA offset for the year. An individual's resident compensation is essentially the total of the individual's salaries, wages, and other amounts from an office or employment, excluding amounts that are exempt from income tax in Canada by virtue of a tax convention or agreement. The pension credit effectively eliminates all but $600 of the individual's RRSP contribution room for the following year. Furthermore, if any contributions made to, or benefits accruing under, the foreign plan in respect of the individual and the calendar year benefit from the application of paragraph 8 of Article XVIII of the Canada-United States Tax Convention, subsection 8308.1(2.1) of the Regulations provides in part that the PA offset is disregarded in the pension credit determination, fully eliminating any RRSP deduction room that would otherwise accrue to the individual in respect of the employment.

An individual's pension credit under section 8308.1 of the Regulations is nil where all contributions in the year to the foreign plan in respect of the individual's employment services are (or would be, where no contributions were made under the foreign plan in the year in respect of the individual because the plan had an actuarial surplus) resident's contributions, as defined in subsection 207.6(5.1) of the Act. Subsection 207.6(5) of the Act provides that where a resident's contribution is made to a non-resident pension plan the plan is deemed for purposes of the resident's contribution to be a separate plan known as a residents' arrangement; the resident's arrangement is deemed to be an RCA; and each person to whom a contribution is made under the residents' arrangement is deemed to be a custodian of the residents' arrangement.

Where an individual resident of Canada becomes entitled in a calendar year (the "service year") to receive benefits under a foreign plan in respect of services rendered to an employer outside Canada in the service year and those services do not relate to a business of the employer in Canada, no pension credit is calculated under section 8308.1 of the Regulations. Rather, section 8308.2 of the Regulations prescribes an amount in respect of the individual for the calendar year following the service year, which reduces the individual's RRSP deduction limit for that calendar year. Unlike the pension credit determined under section 8308.1 of the Regulations, the prescribed amount determined under Section 8308.2 of the Regulations must be self-reported by the individual in his or her personal income tax return in respect of the service year. Generally, the prescribed amount is calculated as the lesser of the money purchase limit for the service year and:

• if the individual is accruing benefits only under a money purchase provision, the amount of the employer's contributions made to the plan in respect of the service year, including any contributions made after the service year (provided these latter contributions are recognized under the laws of the country in which the plan is established as being made in respect of the service year);
• if the individual is accruing benefits only under a defined benefit provision, an amount equal to 10% of such portion of the individual's resident compensation from the employer for the service year as is attributable to the foreign services rendered to the employer; and
• if the individual is accruing benefits under a combination of the two types of provisions, the greater of the two preceding amounts.

The provisions of the Act and Regulations do not permit a Canadian resident taxpayer to determine his or her RRSP deduction limit for a particular taxation year in part by prorating (i) the pension credit determined under section 8308.1 of the Regulations, and (ii) the prescribed amount determined under section 8308.2 of the Regulations, based on the percentage of time the taxpayer rendered services to an employer inside and outside Canada.

In the example in your letter you indicated that the Employee renders employment services to the Employer primarily inside Canada. Consequently, the Employer must calculate and report a pension credit for the Employee for each calendar year in which the Employee becomes entitled, either absolutely or contingently, to benefits under the U.S. Plan, in accordance with subsection 8308.1(2) of the Regulations.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch