18 December 1989 Income Tax Severed Letter 5-9092

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.

Dear Sirs:

This is in reply to your letter of November 10, 1989 wherein you refer to "U.S. sponsored plans such as 401K plans, IRAs, DPSPs, ESOPs and pension plans", and ask for our comments on the tax treatment of amounts received out of each of those plans by

• (a) a person resident in Canada who, while resident and living in Canada, was employed for ten years in the U.S. by a U.S. employer,
• (b) a person resident in Canada who, while resident and living in Canada, was employed for ten years in Canada by a Canadian subsidiary of a U.S. company, or
• (c) a non-resident of Canada who, while a non-resident of Canada, was employed for ten years in Canada by a U.S. employer.

In particular, you ask that we cover the following points on the assumption that an amount has been received out of each of those plans by each of the above-described individuals.

• 1. Could any one of the above mentioned U.S. plans be classed as a retirement compensation arrangement ("RCA"), salary deferral arrangement ("SDA"), employee benefit plan ("EBP") or any other type of plan for the purposes of the Income Tax Act (the "Act")?
• 2. Would participation in an existing Canadian plan (e.g., a pension or deferred profit sharing plan ("DPSP")) cause any anti-avoidance rules to apply to participation in any of the above-mentioned U.S. plans under any of the scenarios described in (a), (b) and (c) above?
• 3. Could there be a mismatch of foreign tax credits if the U.S. plan is taxed on a tax-deferred basis while for Canadian tax purposes the same plan would be taxed on a current basis. In other words, would there be any double taxation occurring on withdrawal after ten years of service? Would it make any difference if the length of service was less than ten years (e.g., 3 or 4 years)?
• 4. Would any Canadian rollover options be available to the employee on withdrawal from any of the abovementioned U.S. plans?

You then ask that we outline the tax treatment on a chart in the manner set out in your letter.

Our Comments

With respect to your request for the preparation of a chart, we do not provide such a service. You may wish to contact a private tax practitioner in this regard.

With respect to point I above, a review of the particular plan is necessary in order to determine the income tax implications inherent therein. Such a review would be made by the relevant district taxation office in respect of an existing plan, or by this office where the plan is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R. We nevertheless set out below some general comments.

With respect to point 2 above, this can be dealt with only on a case-by-case basis having knowledge of all the relevant facts.

IRAs and U.S Pension Plans Including 401(k) Plans

We enclose a copy of the Department's general position (the "General position") with respect to amounts received out of a U.S. individual retirement arrangement ("IRA") or a U.S. pension plan including a 401(k) plan.

With respect to point 3 above, the Income Tax Act (the "Act") provides relief from double taxation of foreign source non-business income in the form of a foreign tax credit computed in accordance with subsection 126(1) of the Act. The calculation is designed to limit the credit to the lesser of foreign taxes paid and the approximate Canadian taxes otherwise payable on the foreign Income. Further information on foreign tax credits can be found in Interpretation Bulletin IT-270R. We also refer you to Articles XXIV and XXIX(5) of the 1980 Canada-U.S. Income Tax Convention which are intended to prevent the double-taxation of income. Nevertheless, it remains possible that double-taxation can result where deferred income is not taxed in the same year by both Canada and the U.S. With respect to whether or not the foreign tax credit provisions of the Act provide an appropriate result where the payment of the foreign tax is deferred for more than 3 or 4 years, we suggest that you contact the Toronto District Taxation Office.

With respect to point 4 above, the General Position discusses the possible rollovers under both current and proposed legislation.

We caution that the General Position does not cover the possibility that a payment out of the plans discussed therein may represent a payment received out of an RCA. This can be determined only on a case-by-case basis having knowledge of all the facts. To the extent that it does represent a payment under an RCA, the provisions of paragraph 56(1)(x) or (z) of the Act will apply and a rollover to a registered retirement savings plan ("RRSP") will be available only to the extent provided in paragraph 60(j.1) of the Act.

U.S. Deferred Profit Sharing Plan ("U.S.-DPSP")

The nature of a payment received out of a U.S.-DPSP cannot be determined without reviewing the terms of the particular plan. If the plan is directed primarily to providing pension benefits, it would probably represent a pension plan. If it is a pension plan, it could represent an EBP or an RCA for Canadian tax purposes. To the extent that amounts received out of the plan reflect amounts received out of an EBP, the comments in the General Position concerning paragraph 6(1)(g) amounts will be generally applicable. To the extent that amounts received out of the plan reflect amounts received under an RCA, the provisions of paragraph 56(1)(x) or (z) of the Act will apply and a rollover to an RSP will be available only to the extent provided in paragraph 60(j.1) of the Act.

U.S. Employee Stock Option Plans ("U.S.-ESOP")

The nature of a payment received out of a U.S.-ESOP cannot be determined without reviewing the terms of the plan. For the reason set out below, we are unable at this time to provide any comments of a general nature concerning these plans.

General Comments

The General Position discussed above relates to amounts received by persons resident in Canada; i.e., those employees described in scenarios (a) and (b) above. With respect to amounts received out of one of the U.S. plans by a non-resident of Canada; i.e., the employee described in scenario (c) above, or with respect to

• (a) amounts received out of a U.S.-ESOP, or
• (b) any other issue raised by you that has not been addressed herein,

we have not previously considered the issues to the extent that we can provide comments that are applicable generally. We are prepared to further consider a particular issue if it is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R. Alternatively, if you have an existing situation in mind, we suggest that you contact the relevant district taxation office.

The above comments reflect our interpretation of the law as it applies generally. They may not, however, always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on the Department.