22 January 1990 Ruling 59361 F - U.S. Employee Savings 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.

January 22, 1990

Dear   19(1)

Re:  U.S. Employee Savings Plan

This is in reply to your letter of December 30, 1989 concerning the taxation of amounts to be received by you out of an Employee Savings Plan (the "Plan") to which your U.S. employer has made contributions.

24(1)

Our Comments

We do not comment on specific proposed transactions other than in reply to advance ruling requests submitted in the manner set out in Information Circular 70-6R.  We nevertheless offer the following general comments.

A plan of this type is normally an employee benefit plan but it is also one to which the retirement compensation arrangement ("RCA") rules of the Income Tax Act (the "Act") may apply.  For example, notwithstanding that paragraph (1) of the definition of an RCA in subsection 248(1) of the Act normally excludes such plans from the RCA rules, subsection 207.6(5) of the Act provides that the RCA rules will apply to such a plan where contributions are made in respect of services rendered by an employee who was resident in Canada when the services were rendered. We note however that contributions to which subsection 207.6(5) would otherwise apply may be exempted, for years before 1991, from the RCA rules by virtue of a proposed exemption discussed at pages 73 and 74 of the document "Saving for Retirement: A guide to the Tax Legislation and Regulations" released by the department of Finance in December 1989. This proposed exemption will apply where the conditions set out therein are met.

The following comments summarize in general terms the taxation of amounts to be received out of the Plan where the RCA rules apply and where those rules do not apply.

1.     RCA Rules Apply

(a)       Amounts received out of the Plan that relate to contributions (both the employee's and the employer's) made to the Plan after 1987 (or such earlier date after October 8, 1986 on which the Plan was materially altered) and any earnings thereon are included in income under paragraph 56(1)(x) of the Act.

(b)       If the amounts included in income pursuant to 1(a) above are received upon or after retirement and may reasonably be considered a retiring allowance, a rollover of such amounts to an RRSP is available to the extent provided in paragraph 60(j.l) of the Act.  The employee's own contributions and the earnings thereon would not be considered a retiring allowance.

(c)       With respect to the employee's own contributions that are included in income under 1(a) above, a deduction is available pursuant to paragraph 60(t) of the Act.

(d)       The balance received out of the Plan is taxed as follows:

(i)      The balance received out of the Plan that is in excess of the employee's own contributions (other than those contributions referred to in 1(c) above) is included in income under paragraph 6(1)(g) of the Act, except to the extent that the amount is received out of a superannuation or pension fund or plan and is attributable to services rendered while the employee was not resident in Canada (see (iii) below).

(ii)      A rollover to an RRSP is not available with respect to an amount included in income under paragraph 6(1)(g) of the Act, as described in (d)(i) above.

(iii)      As indicated in (d)(i) above, if the balance received out of the Plan in excess of the employee's own contributions is received out of a superannuation or pension fund or plan and is attributable to services rendered while the employee was not resident in Canada, that amount is not included in income under paragraph 6(1)(g) of the Act.  Rather, by virtue of subparagraph 6(1)(g)(iii), it is taxable under subparagraph 56(1)(a)(i) of the Act and a rollover to an RRSP is available with respect thereto.  Thus depending upon the facts a rollover to an RRSP may be available with respect to income from the Plan attributable to your employment in  24(1)  Whether or not the Plan is a superannuation or pension fund or plan and whether or not you were not resident in Canada at the relevant times are questions of fact.  We enclose a copy of Interpretation Bulletin IT-221R2 which may assist you in determining your residency status.  The Plan itself would have to be reviewed to determine if it is a superannuation or pension fund or plan.  If the Plan is a "401(K)" plan and is designed to provide retirement benefits, it is recognized as a pension plan for the purposes of the Act.

     We should point out that by virtue of proposed legislation introduced in December 1989, an amount described in subparagraph 6(1)(g)(iii) may be rolled over to an RRSP after 1989 only if the amount is received out of the Plan in a lump sum; i.e., it cannot be one of a number of periodic payments to be received out of the Plan.

2.     RCA Rules do not Apply

     All amounts received out of the Plan in excess of your own contributions are included in income under paragraph 6(1)(g) of the Act, except as noted in (d)(iii) above.  A rollover to an RRSP is available only to the extent mentioned in (d)(iii) above.

The "Tax Treatment" described in the material submitted with your letter relates to U.S. tax law.  For example, the "ten-year averaging" referred to in your letter is not available for Canadian income tax purposes.

The above comments are expressions of opinion only and are not binding on the Department, as stated in paragraph 24 of Information Circular 70-6R.  We trust however that they are of assistance to you.

Yours truly,

W. Douglas for DirectorFinancial Industries, DivisionRulings Directorate