Revenue Canada Taxation Head Office
K.B. Harding (613) 957-2129
JUL 18 1988
Dear XXXX
This is in reply to your letter of November 9, 1987 wherein you requested our views concerning the treatment of amounts received out of a 401(k) Plan.
We have recently completed our review of amounts received out of various retirement plans in the United States and are attaching a copy of a general statement of our position concerning the treatment of payments out of such plans.
It is our view that amounts received out of a 401(k) plan are considered to be amounts received out of a pension plan and are subject to tax when received by the taxpayer. Where, the amounts are attributable to services rendered by a taxpayer during a period when he was not a resident of Canada, the entire amount received from the plan would be taxed as pension benefits and may be eligible for a rollover to a RRSP.
XXXX
If you were a resident of Canada for tax purposes while working in the United States and your employer made contributions to the profit sharing portion of the 401(k) plan, the amounts received out of the plan, other than a return of amounts contributed to the plan by you, would be taxable in Canada as amounts received out of an employee benefit plan in the year received. In this situation, the amounts received out of the plan are not eligible for rollover to an RRSP.
However, if your employer made no contributions to the 401(k) plan and you resided in Canada while working in the United States, the entire amounts received out of such a 401(k) would be treated as income from a pension. Such amounts received would be eligible for a rollover to an RRSP.
In summary any amounts received by you out of a 401(k) plan will be included in your income in the year received. The only difference is in one situation you may be permitted to roll an amount into a RRSP. However, under the proposed pension reform, restrictions are proposed to limit the rollovers to lump sum payments except where the transitional rules apply.
In order to avoid double taxation you will be permitted a foreign tax credit in respect to any tax paid to the United States. Whether or not any tax is payable in Canada on the amounts received out of the 401(k) plan after you receive a foreign tax credit will depend on your particular financial situation.
We trust this is adequate for your purposes and regret the delay in responding to your letter.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch