13 June 2023 External T.I. 2022-0952971E5 - U.S. 403(b) plan

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: (1) What is the character of a U.S. 403(b) plan (and the underlying Roth 403(b) account) for Canadian tax purposes? (2) What are the Canadian tax implications to the taxpayer and her spouse for payments received under the U.S. 403(b) plan and the Roth 403(b) account as Canadian residents? (3) What are the tax implications to the taxpayer and her spouse pursuant to Article XVIII of the Canada-U.S. Tax Treaty?

Position: (1) The U.S 403(b) plan is likely an employee benefit plan (EBP). Accordingly, the underlying Roth 403(b) account is also an EBP. (2) Amounts received out of an EBP are included in a taxpayer's income under paragraph 6(1)(g) subject to the exceptions in subparagraphs 6(1)(g)(i) - (iv). (3) If the 403(b) plan qualifies as a "pension" for purposes of the definition in Article XVIII(3), under Article XVIII(1), distributions will be exempt from Canadian tax to the extent that they would have been exempt from U.S. tax if paid to a resident of the U.S.

Reasons: (1) The U.S. 403(b) plan falls within the definition "employee benefit plan" in subsection 248(1). (2) Amounts received out of an EBP are included in income under paragraph 6(1)(g) unless an exception applies. Under subparagraph 6(1)(g)(iii), an amount that is a pension benefit is excluded from income under paragraph 6(1)(g) but, included in income under subparagraph 56(1)(a)(i). Otherwise, an amount is included in income under paragraph 6(1)(g) unless subparagraph 6(1)(g)(ii) excludes the amount because it is a return of contributions to the beneficiary that has not been deducted in computing their income in a tax year.

XXXXXXXXXX								2022-095297
K. Podor

June 13, 2023

Dear XXXXXXXXXX:

Re: United States 403(b) plan

This is in reply to your correspondence of October 21, 2022, wherein you request our views concerning the Canadian income tax treatment of certain distributions from a United States (“U.S.”) 403(b) plan received by a Canadian resident. In particular, you ask whether the portion of a distribution from a 403(b) plan that is designated by the plan’s governing body as a “Minister’s housing allowance” and excluded from tax for U.S. tax purposes would be subject to Canadian taxation if received by a resident of Canada.

You provide the following facts:

1. You and your spouse are currently residents of the U.S. and plan to immigrate to Canada on or after retirement.

2. You and your spouse participate in a 403(b) plan. The 403(b) plan operates for the purpose of providing retirement benefits for participants or their dependants. The 403(b) plan has a Roth contribution program (“Roth 403(b) account”).

3. Contributions to the 403(b) plan were made by:

a. you, as after-tax contributions;

b. your spouse, as both pre-tax and after-tax contributions (to the Roth 403(b) account); and

c. your spouse’s employer.

4. After immigrating to Canada, you and your spouse will begin withdrawing funds from the 403(b) plan. All or a portion of the distributions from the 403(b) plan received by you and your spouse will be designated as a Minister’s housing allowance by the plan’s authorized governing body. Under section 107 of the Internal Revenue Code, a Minister’s housing allowance is excluded from income for U.S. tax purposes.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) (footnote 1) 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 70-6R12, 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.

In determining the Canadian tax treatment of a foreign pension 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 ultimately depends on the nature and purpose of the specific plan in question.

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. 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 pension plan exists 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.

Although it is a question of fact whether a particular plan will be considered an EBP for Canadian income tax purposes, we generally consider a 403(b) plan, including the Roth 403(b) account to be an EBP.

If it is determined that a 403(b) plan is an EBP, the amounts received out of the plan by a resident of Canada will be included in income under paragraph 6(1)(g) in the year received, subject to the exceptions set out in subparagraphs 6(1)(g)(i) to (iv). The exception under subparagraph 6(1)(g)(ii) applies to a return of employee contributions that were not deducted in computing the taxable income for any taxation year. The exception under subparagraph 6(1)(g)(iii) applies where the plan is determined to be a pension plan and the pension benefit received out of the plan is attributable to employment services rendered by a person while not resident in Canada, in which case the amount received from the plan would be taxable under subparagraph 56(1)(a)(i).

Article XVIII(1) of the Canada-U.S. Income Tax Convention (the “Treaty”) provides that a distribution from a pension to an individual resident in Canada will generally be exempt from Canadian tax to the extent that the distribution would be excluded from U.S. taxable income if the individual was resident in the U.S. A 403(b) plan qualifies as a pension for purposes of Article XVIII of the Treaty. Therefore, pursuant to Article XVIII(1) of the Treaty, distributions received from a 403(b) plan by a resident of Canada that are designated as a Minister’s housing allowance and are excluded from income for U.S. tax purposes are not taxable in Canada. Article XVIII(1) of the Treaty also applies to exempt any distributions received by a resident of Canada from a Roth 403(b) account provided these amounts are not taxable in the U.S. if the individual was a resident of the U.S.

Where a taxpayer is subject to tax in the U.S. on distributions under a 403(b) plan, a foreign tax credit may be available on the taxpayer’s Canadian income tax and benefit return in connection with any taxes paid to the Internal Revenue Service. 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 property reporting requirements may be applicable . Please refer to the CRA web page Foreign Income Verification Statement for more information about these reporting requirements.

We trust these comments will be of assistance.

Yours truly,

Irina Schnitzer
A/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 All references are to the Income Tax Act unless stated otherwise.