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.
Principal Issues: Whether a provident fund established as an independent trust in the Isle of Man is an employee benefit plan, a pension plan, or both for purposes of the Act.
Position: Question of fact.
Reasons: Insufficient information to provide determinative comments.
Author: Kimberly Duval, CPA, CA
Section: 6(1)(g); 56(1)(a)(i); 248(1) "employee benefit plan"
October 5, 2020
Re: Provident Fund – Isle of Man
This is in reply to your emails of June 22 and July 15, 2020, in which you inquire whether amounts received by a resident of Canada from a provident fund (“PF”) established as an independent trust in the Isle of Man would be included in your income under the Income Tax Act (footnote 1).
We understand your facts to be as follows:
* You were previously resident in the United Arab Emirates during which time your employer established an independent trust in the Isle of Man on your behalf.
* Both you and your employer made contributions to the PF.
* The benefits from the PF are attributable to services you rendered while a non-resident of Canada.
* You plan to begin withdrawing funds from the PF in the near future.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
As a resident of Canada, you are taxable in Canada on your worldwide income. Any amounts received from a PF in the Isle of Man would generally be included in your income pursuant to either subparagraph 56(1)(a)(i) or paragraph 6(1)(g).
In determining the Canadian tax treatment of a foreign fund or plan (“plan”), one needs to consider whether the plan is an employee benefit plan (“EBP”), a pension plan, or both for purposes of the Act. This determination is ultimately dependent on the nature and purpose of the specific plan in question, but we trust these general comments will be helpful to you.
An EBP is defined in subsection 248(1). In general terms, an EBP is any arrangement under which the employer or someone not dealing at arm’s length with the employer makes contributions to another person and under which one or more payments will be made to or for the benefit of employees, former employees or persons with whom the employees or former employees do not deal at arm’s length.
The term pension plan is not defined in the Act. As previously stated, the determination of whether a plan is a pension plan is a question of fact. A plan can be a pension plan for purposes of the Act regardless of whether it is registered under the Act and regardless of whether it is established inside Canada or outside Canada. Generally, a plan will be considered to be a pension plan under the Act where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payment on or after the employee’s retirement.
A foreign pension plan would generally fall within the EBP definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan.
Where it is determined that the PF is an EBP, the amounts received from the plan would be taxable under paragraph 6(1)(g), subject to certain exceptions. One of those exceptions is where the plan is determined to be a pension plan and the benefits received out of the plan are attributable to services rendered by a person in a period throughout which the person was not resident in Canada. In that case, the amounts received from the plan would be taxable under subparagraph 56(1)(a)(i). The full portion of the amount will be included in income under subparagraph 56(1)(a)(i) even if the employee’s contributions to the pension plan were not deductible under the Act and even if the pension benefits are tax-free in whole or in part in a foreign jurisdiction.
Where the amount received out of the PF is a lump sum amount that is taxable under subparagraph 56(1)(a)(i), a deduction may be permitted under paragraph 60(j) relating to all or a portion of the lump sum which is transferred to a registered retirement savings plan or to a registered pension plan. The tax-deferred rollover is not available for amounts which are received on a periodic basis out of the pension plan. For more information, see paragraph 26 of Interpretation Bulletin IT-528, Transfers of Funds Between Registered Plans.
For your reference, there is currently no limitation on Canada’s right to tax amounts withdrawn from the PF by a Canadian resident as Canada has not entered into an income tax convention with the Isle of Man.
However, if you are subject to tax in the Isle of Man on amounts withdrawn from the PF, in general, a foreign tax credit may be available on your Canadian income tax and benefit return in connection with any taxes paid to the government of the Isle of Man. The foreign tax credit will reduce or eliminate the potential for double taxation of such income. For more information on claiming a foreign tax credit, please refer to Income Tax Folio S5-F2-C1, Foreign Tax Credit.
Further, the foreign reporting requirements may be applicable to you upon your return to Canada.
We trust these comments will be of assistance.
Kimberly Duval, CPA, CA
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise indicated, all references are to the Income Tax Act.
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