2021-0909731E5 Hong Kong Mandatory Provident Fund

Principal Issues: In a described situation, what would be the tax treatment of contributions to and withdrawals from a registered scheme (the "Plan") established under Hong Kong’s Mandatory Provident Fund system?

Position: The tax treatment would be determined on the basis that the Plan is an EBP, except to the extent (if any) that the RCA rules apply to the Plan.

Reasons: The legislation.

Author: Pietrow, Victor
Section: 6(1)(g); 248(1) "employee benefit plan", "salary deferral

XXXXXXXXXX

                                                                                                           2021-090973
                                                                                                           V. Pietrow

Dear XXXXXXXXXX:

RE: Hong Kong Mandatory Provident Fund

We are writing in response to your letter of September 9, 2021 regarding the Canadian income tax treatment of contributions to, and withdrawals from, a registered scheme under Hong Kong’s Mandatory Provident Fund (HKMPF) system by a resident of Canada.

We understand, based on your letter to us, that the HKMPF system is a defined-contribution system established under the laws of Hong Kong. Where the HKMPF system applies, the employer and the employee are both required by Hong Kong law to make mandatory contributions into an HKMPF registered scheme, subject to the minimum and maximum relevant income levels. Mandatory contributions and investment returns derived from those contributions are fully and immediately vested in the employee and cannot be withdrawn unless the employee retires or certain other criteria are met.

In the situation you describe, an individual (the Taxpayer) immigrates to Canada and subsequently becomes a Canadian resident. The Taxpayer is then subsequently employed by a Hong Kong-based company (the Employer) while continuing to be a resident of Canada. You indicate that the HKMPF system applies to the Employer and the Taxpayer and as a result, both make mandatory HKMPF contributions to a registered scheme (the Plan) for each year of service of the Taxpayer. Neither the Employer, nor the Taxpayer, make any voluntary contributions to the Plan.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (footnote 1) (the 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 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

A resident of Canada is taxable in Canada on their worldwide income, subject to the provisions of any applicable tax treaty. There is nothing in the Canada-Hong Kong Income Tax Agreement (footnote 2) that precludes Canada’s right to tax the Taxpayer’s benefits under the Plan.

As such, based on the situation described (and specifically the fact that all services were rendered by the Taxpayer while a resident of Canada), amounts received by the Taxpayer from the Plan would generally be included in the Taxpayer’s income pursuant to either paragraph 56(1)(x) or paragraph 6(1)(g), depending on whether the retirement compensation arrangement rules (RCA) or the employee benefit plan (EBP) rules apply to the Plan. In our view, the Plan would be considered an EBP – except for the portion, if any, of the Plan that is determined to be an RCA.

Retirement compensation arrangement

Generally, an RCA is an arrangement under which an employer makes contributions to a third-party custodian in connection with benefits that are payable to employees after retirement or termination of employment.

Foreign plans are generally not considered RCAs, as the RCA definition in subsection 248(1) specifically excludes plans that are maintained primarily for the benefit of non-residents in respect of services rendered outside of Canada. However, if a foreign plan otherwise meets the RCA definition and contributions have been made to the plan in connection with services rendered by Canadian resident employees (as described in this case) and certain other conditions are met, the RCA residents’ arrangement rules in subsections 207.6(5) and (5.1) may apply to treat the Canadian portion of the plan as an RCA.

We note that whether the RCA residents’ arrangement rules would apply to any foreign plan is a question of fact. We do not have sufficient information in this case to make such a determination in respect of the Plan. However, if it is determined that these rules apply, amounts received out of the Plan in a tax year by the Taxpayer would be included in income under paragraph 56(1)(x) for the year. As the Plan is located outside Canada, contributions to the Plan by the Taxpayer would not be deductible under paragraph 8(1)(m.2); however, a deduction may be available to the Taxpayer under paragraph 60(t) for a tax year for the portion of an amount received out of the Plan representing a return of the Taxpayer's contributions.

Please refer to T4041 Retirement Compensation Arrangements Guide for more information regarding the RCA residents’ arrangement rules and the tax treatment with respect to contributions to and withdrawals from an RCA.

Employee benefit plan

An EBP is generally any arrangement under which an 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 definition of EBP in subsection 248(1) excludes a number of plans or arrangements, including RCAs.

If it is determined that the EBP rules apply to the Plan instead of the RCA residents’ arrangement rules, amounts received out of the Plan in a tax year by the Taxpayer would be included in income under paragraph 6(1)(g) for the year, except, by virtue of subparagraph 6(1)(g)(ii), the portion received that represents a return of undeducted employee contributions. There is no provision in the Act (or Canada-Hong Kong Income Tax Agreement) that allows an individual to claim a deduction for their contributions to an EBP.

From the Taxpayer’s perspective, the tax treatment is generally the same regardless of whether the RCA residents’ arrangement rules or the EBP rules apply. The Taxpayer will be subject to tax on the amount received from the Plan net of the portion that represents a return of undeducted employee contributions.

Foreign tax credit

If the Taxpayer is subject to tax in Hong Kong on distributions from the Plan, a foreign tax credit may be available on their Canadian income tax and benefit return in connection with taxes paid to the government of Hong Kong. For more information on claiming a foreign tax credit, refer to Income Tax Folio S5-F2-C1, Foreign Tax Credit.

Foreign property reporting

Also, taxpayers need to be mindful of any foreign reporting requirements pursuant to section 233.3 that may be applicable. If at any time in a taxation year a Canadian resident’s total cost amount of all specified foreign property was more than $100,000, the individual is required to file a Form T1135, Foreign Income Verification Statement for the year.

We trust that these comments will be of assistance.

Yours truly,



Kimberly Duval, CPA, CA
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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.

2 The Canada-Hong Kong Income Tax Agreement, as signed on November 11, 2012.

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2022

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2022