Unlocking Pension Plans: Rules for Non-Residents Eva M. Krasa and Colin Simpson April 2, 2003 1. Introduction Locking-in refers to a legislative regime that forces members and former members of pension plans to use pension money to provide for retirement income. This article is intended to describe the rules relating to unlocking of pension money by non-residents of Canada. There are currently four Canadian jurisdictions that explicitly permit unlocking by non-residents: British Columbia, Alberta, Quebec and Canada. This article first reviews the applicable provisions of the legislation in each of these jurisdictions and then considers the meaning of non-residency for this purpose. 2. Applicable Legislation (a) British Columbia Section 30(12) of the Pension Benefits Standards Act, R.S.B.C. 1996, c. 352 provides for unlocking of pension money where the member, former member, spouse, surviving spouse or former spouse (a) has been absent from Canada for 2 or more years, and (b) has become a non-resident of Canada as determined for the purposes of the Income Tax Act (Canada) (the "ITA"). CALGARY MONTRÉAL OTTAWA TORONTO VANCOUVER
The Pension Benefits Standards Regulation, B.C. Reg. 433/93 sets forth additional procedural requirements. The person claiming the benefit of section 30(12) must complete a certificate of non-residency (Form 6), attach written evidence that the Canada Customs and Revenue Agency (the "CCRA") has determined the person to be a non-resident of Canada and file the completed Form 6 with each relevant pension plan and financial institution. If there is a spouse, a waiver of spousal entitlements is also required. (b) Alberta The Alberta legislation is similar to that of British Columbia in that it also refers to non-residency for purposes of the ITA. Section 39(11) of the Employment Pension Plan Regulation, Alberta Reg. 35/2000 provides that pension money may be withdrawn as a lump sum if the owner applies to the financial institution with written evidence that the CCRA has confirmed that he/she has become a non-resident for purposes of the ITA. Unlike the British Columbia legislation, this provision applies to unlock pension money from lockedin transfer vehicles only (locked-in retirement accounts ("LIRAs"), life income funds ("LIFs") and locked-in retirement income funds ("LRIFs")), and does not apply to money in pension plans. The spouse, if any, must waive all entitlements. (c) Quebec Sections 19(7.1) and 29(8.1) of the Regulation respecting supplemental pension plans, c. R-15.1, r.1 provide that money may be withdrawn in a lump sum if the person making the withdrawal "has not resided in Canada since at least 2 years". As with the Alberta legislation, this provision applies only to the withdrawal of money from locked-in transfer vehicles (LIRAs and LIFs), rather 2
than to pension plans. There is no reference to the ITA or other specific guidance as to the meaning of residence for this purpose. (d) Canada The Pension Benefits Standards Regulations, 1985 SOR/87-19 (the "Federal Regulation") provide in section 28.4(1) that pension benefits or pension benefit credits are exempt from the locking-in provisions where the plan member or former member has "ceased to be a resident of Canada for at least two calendar years and has ceased employment with the employer who is a party to the plan or ceased membership in a multi-employer pension plan". As in the case of Quebec, there is no reference to the ITA, although section 28.4(2) deems a member or former member to have been a resident of Canada throughout a calendar year "if that member or former member has sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more." 3. Non-Residency Status (a) British Columbia and Alberta As discussed above, under the British Columbia and Alberta legislation, the question of whether an individual is a non-resident of Canada is determined by reference to his/her status under the ITA. The individual must provide written evidence that the CCRA has determined that he/she is a non-resident of Canada for purposes of the ITA. In British Columbia there is an additional requirement that the individual has been absent from Canada for two or more years (which, as discussed below, may or may not be the same as being non-resident for tax purposes). 3
It is perhaps understandable that the pension legislators have adopted the meaning of non-resident for income tax purposes. Residency is a critical concept under the ITA a person s liability for income tax is based on his/her status as a resident or a non-resident of Canada. An individual who is resident in Canada during the year is subject to Canadian income tax on worldwide income, while a non-resident individual is subject to Canadian income tax only on income from sources in Canada, such as Canadian source business and employment income. Canadian withholding tax may apply on payments to a non-resident of certain passive types of income, such as interest and dividends. The term "resident" is not actually defined in the ITA, although the ITA does provide that persons who are "ordinarily resident" in Canada, or who sojourn in Canada for 183 days or more in any calendar year, are deemed to be resident in Canada. The absence of a definition of "resident" in the ITA requires that one look to the very substantial body of case law that exists on the determination of an individual s residence. The Courts have held "residence" to be "a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question". 1 The Courts have also held that an individual is "ordinarily resident" in the place "where in the settled routine of his life he regularly, normally or customarily lives". 2 CCRA s views on the determination of residency are set out in Interpretation Bulletin IT-221R3 dated October 4, 2002 (which is an update of a previously issued Interpretation Bulletin). In IT-221R3, CCRA comments at length on factors to be taken into consideration in determining residence status 1 2 See: Thomson v. MNR 2 DTC 812 (SCC) at 816. Ibid., at 813. 4
where an individual leaves Canada. In CCRA s view, the most important factor to be considered in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes is whether or not the individual maintains residential ties with Canada while he/she is abroad. Unless an individual severs all significant residential ties with Canada upon leaving Canada, CCRA will generally consider the individual to continue to be a resident of Canada. The residential ties that are considered most significant for purposes of determining residence status are the individual s dwelling place and where the individual s spouse and dependants reside (a dwelling place located in Canada may not be considered to be a significant residential tie with Canada if it is leased to a third party on arm s length terms). Secondary residential ties that will be looked at collectively in determining an individual s residence status while outside Canada include: personal property in Canada (e.g. furniture, clothing and cars); social ties with Canada (e.g. club memberships); economic ties with Canada (e.g. employment with a Canadian employer, Canadian bank accounts and credit cards); medical insurance coverage from a province of Canada; Canadian driver s licence; and a seasonal dwelling place in Canada. Other residential ties which are generally less important, but may be taken into account in combination with other ties, include the retention of a Canadian mailing address, post office box or safety deposit box and telephone listings in Canada. 3 In its previous Interpretation Bulletin, CCRA was of the view that where an individual was absent from Canada for two years or longer he/she should be presumed to have become a non-resident. The two-year presumption has been retracted in the current IT. Accordingly, no particular length of stay abroad necessarily results in an individual being a non-resident. If an individual maintains residential ties with Canada while abroad, a number of factors will be 3 For a review of the numerous factors relevant to the determination of residency status, see: Lee v. MNR, 90 DTC 1014 (TCC). Many of the factors set out in the Interpretation Bulletin are reflected in CCRA s form "Determination of Residency Status (Leaving Canada)" which should be completed and filed by persons departing Canada. 5
relevant in evaluating the significance of those ties: evidence of intention to permanently sever residential ties with Canada; regularity and length of visits to Canada; and residential ties outside Canada. Where an individual is resident both in Canada and in another country with which Canada has a treaty and, under the "tie-breaker rules" in that treaty the individual is determined to be a resident of the other country for purposes of the treaty, then the individual will be deemed to be a non-resident of Canada for all purposes of the ITA. (b) Canada and Quebec Unlike the British Columbia and Alberta legislation, the Federal Regulation refers to an individual who has "ceased to be a resident of Canada for at least two calendar years", without any reference to the ITA (although it does include the same 183 day rule as is contained in the ITA rules). The Quebec provision refers to an individual who "has not resided in Canada since at least 2 years", again without any reference to the ITA. Neither the Federal Regulation nor the Quebec rules provide a definition of "residence". Accordingly, for purposes of the Federal Regulation, the substantial body of case law considering the ordinary meaning of the term in the context of the ITA would still be relevant notwithstanding the absence of a reference to the ITA (although evidence that CCRA has confirmed the individual's non-resident status is not actually required). For Quebec purposes, it is necessary to look to the provisions of the Civil Code of Quebec regarding domicile and residence. However, the Code (like the ITA) does not provide an actual definition of residence, but states that a person's residence is the place where he ordinarily resides. As a result, for Quebec purposes one must look to the case law under the Civil Code. In general, the courts have given "residence" under the Civil Code an interpretation similar to that under the ITA. 6
A further difference between the Federal Regulation and the Quebec legislation on the one hand, and the British Columbia and Alberta legislation on the other, is that under the Federal Regulation and the Quebec legislation the individual must have been non-resident for two years before unlocking is permitted, while in British Columbia and Alberta unlocking is permitted at any time after non-residency status is established. 7