17 July 2001 External T.I. 2001-0072655 - HONG KONG'S MANDATORY PROVIDENT FUND

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: Will the Mandatory Provident Fund Scheme Ordinance established as of December 1, 2000 in Hong Kong qualify as a pension for purposes of the Act?

Position: Yes.

Reasons: Based on a review of the plan's documents, the Mandatory Provident Fund Scheme Ordinance would qualify as a pension for purposes of the Act.

XXXXXXXXXX 2001-007265

M. P. Sarazin, C.A.

July 17, 2001

Dear XXXXXXXXXX:

Re: Hong Kong's Mandatory Provident Fund Scheme Ordinance

This is in reply to your letter of February 26, 2001, acknowledging receipt of our letters dated January 17, 2001 and November 30, 2000 and requesting our views as to whether the Mandatory Provident Fund Scheme Ordinance (the "Plan") that was implemented in Hong Kong, effective December 2000, would qualify as a foreign pension plan for purposes of the Income Tax Act (Canada) (the "Act").

Your most recent letter included several documents published by the Government Printer, Hong Kong Special Administrative Region relating to the general operation of the Plan. Based on the information provided in these documents, the Plan was designed to assist members of the workforce to save money for their retirement. The Plan is a compulsory contribution fund and all employees and self-employed persons aged between 18 and 65, unless exempted, are required to participate and make contributions to the Plan.

Under the Plan, employees and employers are required to make mandatory contributions, which are deductible within the limits allowed under their income tax laws, and they can make additional non-deductible voluntary contributions. All contributions to the Plan vest immediately. Except in special circumstances as stipulated in the Plan, a member of the Plan is only entitled to withdraw accrued benefits relating to the mandatory contributions on retirement at age 65, death and incapacity. On termination of employment with an employer, a member is deemed to have received, as employment income, the amount of voluntary employer contributions made by the employer that exceeds the proportionate benefit calculated in accordance with the Plan. This is the case whether or not the amounts remain in this Plan or they are transferred to another plan. The proportionate benefit that is exempt from tax is computed by taking total employer voluntary contributions into the Plan for the member and multiplying by the proportion resulting when the number of months of service with the employer is divided by 120 months.

Question #1

Would the Plan qualify as a foreign pension plan for purposes of the Income Tax Act (the "Act")?

Response

Based on our understanding of the Plan, the Plan would constitute a foreign pension plan for purposes of the Act.

Question #2

If a member of the Plan becomes a resident of Canada, will earnings in the Plan attributable to the period that the member resides in Canada be subject to tax under the Act? Will section 94 and 94.1 apply to the earnings in the Plan while the member resides in Canada?

Response

The provisions of subsections 94(1) and 94.1(1) will not apply to an exempt foreign trust. An exempt foreign trust has the meaning assigned by subsection 94(1) of the Act. A foreign pension plan will generally qualify as an "exempt foreign trust" for purposes of subsection 94(1) of the Act.

Question #3

Will a member of the Plan that becomes a resident of Canada have to file a Foreign Income Verification Statement in respect of his or her membership in the Plan?

Response

If at any time in a taxation year a Canadian resident's total cost amount of all specified foreign property was more than $100,000, the individual is required to file a Foreign Income Verification Statement (T1135). We note that "specified foreign property" does not include an interest in a non-resident trust principally providing superannuation, pension, retirement or employee benefits primarily to non-resident beneficiaries, that does not pay income tax in the taxing jurisdiction where it is resident.

Question #4

If subsequent to moving to Canada, a member of the Plan withdraws the full amount owing under the Plan in a lump-sum, how will the lump-sum payment be taxed and will the payment be eligible for transfer to a registered retirement savings plan ("RRSP")?

Response

The Canada Customs and Revenue Agency (the "Agency") has presented its general views with respect to superannuation and pension benefits in Interpretation Bulletin IT-499R titled "Superannuation or pension benefits". You will note that 9 of IT-499R deals with foreign superannuation or pension plans. Unless exempted by the provisions of a tax treaty, amounts received by a resident of Canada out of a foreign pension plan are included in the recipient's income under subparagraph 56(1)(a)(i) of the Act.

The Agency's general views regarding the transfer of amounts to a registered retirement savings plan are found in Interpretation Bulletin IT-528 titled "Transfers of Funds Between Registered Plans". Generally, where a resident of Canada receives a lump-sum payment from a foreign pension plan, the payment is included in the recipient's income under subparagraph 56(1)(a)(i) of the Act, the amount is not eligible for a deduction under subparagraph 110(1)(f)(i) of the Act and the amount may be transferred to an RRSP. You will find the relevant comments relating to such transfers to RRSPs in 26 of IT-528.

Question #5

If a member of the Plan moves back to Hong Kong after becoming a Canadian resident, will the growth in the Plan that is attributable to the period of residence in Canada be taxed on his or her departure?

Response

The Taxpayer Migration amendments to the Act were included in Bill C-22 which received Royal Assent on June 14, 2001. Subject to certain exceptions, subsection 128.1(4) of the Act deems an individual emigrant from Canada as having disposed of all his or her properties. Since there is an exception for pension or similar rights, an individual that emigrates is not deemed to have disposed of his or her pension rights.

Question #6

If the member makes contributions to the Plan while he or she resides in Canada, will the contributions (mandatory or voluntary) be deductible under the Act.

Response

There is no provision in the Act that allows an individual to claim a deduction for his or her contributions to a foreign pension plan. Where a resident of Canada and his or her employer make contributions to a foreign pension plan, the contributions are generally considered contributions to an employee benefit plan. The individual is not entitled to a deduction for his or her contributions to an employee benefit plan. You will note that this is discussed in 9 of IT-499R. Normally, foreign pension plans are excluded from the retirement compensation arrangement rules under paragraph (l) of the definition of retirement compensation arrangement in subsection 248(1) of the Act. Consequently, the contributions will not qualify for the retirement compensation arrangement deduction allowed under paragraph 8(1)(m.2) of the Act.

The above general comments are based upon the limited information that has been provided with your letter. The ultimate determination of the tax consequences related to specific individuals will be a question of fact.

Copies of Interpretation Bulletins are available on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust that the above comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate