21 October 1999 Internal T.I. 9926907 - WITHHOLDING ON REFUND EXCESS CONTRIBUTIONS

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 refund of excess contributions from pension plan under the 50% rule is subject to tax in Canada when paid to a resident of UK

Position: Yes

Reasons: In settlement of all future entitlements

			October 21, 1999

	International TSO	Headquarters
	Non-Resident Withholding 	S.E. Thomson
	  Accounts Division		957-8953

	Attention:  Claude Vincent
			992690

Refund of Excess Contributions Under the 50% Rule

This is in reply to your memorandum of October 1, 1999 in which you ask for our technical assistance with the interpretation and application of Article 17 of the Canada-U.K. Income Tax Convention (the "Treaty").

In short, per Article 17 of the Treaty, pension payments arising in Canada and paid to U.K. residents are not taxable in Canada unless they are "any payment under a superannuation, pension or retirement plan in settlement of all future entitlements under such a plan".

The taxpayer has received a refund of excess contributions in a lump-sum from the XXXXXXXXXX upon her termination from employment. The refund was to be paid in cash if the taxpayer elected to either a) receive a deferred pension, or b) to transfer the commuted value of the pension to a locked-in RRSP. The taxpayer's representative believes that she chose to receive a deferred pension.

We refer you to the Registered Pension Division Newsletter 98-2 for a discussion of refunds of excess member contributions under the "50% rule". The rule provides, in effect, that member contributions (plus interest) cannot provide more than 50% of the value of the member's defined benefit pension. Employee contributions plus interest above this 50% are considered "excess" contributions, which are refundable to the employee.

Had the taxpayer continued employment with another participating XXXXXXXXXX employer or other government pension plan, she would have been able to transfer the excess to the new employer's plan. However, since she did not commence employment with an eligible employer, she was required to receive the excess in cash.

In our opinion, the refund of excess contributions represents the commuted value of the future pension that would have arisen as a result of the contributions. As such, the refund is in settlement of all future entitlements under the pension plan as contemplated by paragraph 3 of Article 17 of the Treaty, and is therefore not a "pension" as defined in paragraph 1 of Article 17. Accordingly, the amount is subject to withholding tax as set out in Part XIII of the Act.

Please contact us if you have any questions.

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