Revenue Canada Taxation Head Office
K. Harding (613) 957-2129
July 3, 1986
XXXX
This is in reply to your letter of May 8, 1986 concerning the treatment of amounts received out of a private pension plan fund.
It is our understanding that you have a client who is a U.S. citizen and is planning to move to Canada. He has a private pension plan in the U.S. that has been built up with contributions from U.S. sources of earned income. His contributions to the plan and the plan's earnings have not been taxed in the U.S. and any amounts distributed from the pension plan would normally be subject to tax in the U.S. Your client plans to withdraw $30,000 per year commencing in the near future.
You have requested our opinion on the treatment of amounts withdrawn from the U.S. pension fund if your client becomes a resident of Canada. In addition, you were enquiring whether it is possible to transfer the amounts in a private pension plan fund to Canada and the treatment for Canadian tax purposes.
Where a resident of Canada receives an amount in the year out of a U.S. pension fund or plan such amounts will generally be included in his income in accordance with subparagraph 56(1)(a)(i) of the Canadian Income Tax Act (the "Act") to the extent that they do not represent a return of contributions to an employee benefit plan (EBP) or are not taxed under paragraph 6(1)(g) of the Act (see paragraph 3 and 8 of the attached Interpretation Bulletin IT-499 ).
If a U.S. pension fund falls within the definition of an EBP all amounts received out of or under the plan will be taxable in the hands of the individual under paragraph 6(1)(g) as income from an office or employment, except where the amount qualifies as a death benefit, represents a return of the beneficiary's contributions to the EBP (See Interpretation Bulletin IT-502 ), or any portion which is attributable to services rendered by the individual in a period during which he was not resident in Canada. Your letter appears to indicate that any benefits your client may receive would fall within this latter restriction and accordingly would probably be taxable pursuant to subparagraph 56(1)(a)(i) of the Act as outlined in the preceding paragraph.
Paragraph 17(d) of Interpretation bulletin IT-124R5 (copy attached) indicates that payments out of certain foreign pension plans may be eligible for a rollover to a Registered Retirement Savings Plan (RRSP). Amounts received out of a RRSP will be subject to tax when received by a resident of Canada. In order for Revenue Canada to give you a firm reply we would require more details with respect to your client's pension plan. It should be noted that even if you could roll over an amount out of a private pension plan in the United States to a RRSP you would probably be taxable in the U.S. on the amount rolled-over to the RRSP since Internal Revenue Service would probably not recognize its rollover for U.S. tax purposes.
The Canada-U.S. Income Tax Convention (Convention) provides for withholding tax equal to 15 percent of the gross amount of periodic payments paid by a U.S. payor from a U.S. pension fund to a Canadian resident and 30 percent with respect to lump sum payments. In order to avoid double taxation, Canada will provide a resident of Canada with a foreign tax credit equal to the lesser of the foreign tax paid and the Canadian taxes paid on that source of income. However, where an amount is rolled-over from a U.S. pension fund to a RRSP in Canada, there will probably be no taxes paid in Canada and consequently no relief will be granted for the tax withheld in the U.S. The Convention also provides that residents of Canada who are also U.S. citizens will continue to be taxed in the U.S. at domestic rates rather than at the rates set out above. We would recommend you contact the Internal Revenue Service concerning the U.S. taxation of such payments.
We trust this is adequate for your purposes.
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