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.
