Canadian citizens living and working in Canada, paid in Canadian curre

[John A]

I have read through the 3 threads copied below and I am still not clear on the answers to the questions below:

http://www.benefitslink.com/boards/index.php?showtopic=3901

http://www.benefitslink.com/boards/index.php?showtopic=4026

http://www.benefitslink.com/boards/index.php?showtopic=10349

If a U.S. company has a location in Canada, can the Canadian citizens living in Canada, working in Canada, and being paid in Canadian currency for service at this Canadian location, make 401(k) salary deferrals? [is their pay taxable in the U.S.?]

Do these Canadian employees have to be included in coverage testing?

Do these Canadian employees have to be included in ADP/ACP testing?

[JanetM]

No US source income - no eligible deferral. Why not set up RRSP - (Registered Retirement Savings Plan) for canadian citizens. I easy enought to do - operates like IRA. Employer just forwards funds on to custodian.

[mbozek]

Is it possible that the employer is doing something stupid here, like converting the ee's canadian dollars to US dollars in order for contributions to be made to the plan? The exchange rate for Canadian dollars to US dollars is about 3 to 2.

[four01kman]

In order to participate in the US salary deferral plan, they need to be on the US payroll. Then, even if converted to Canadian dollars, they could defer.

[John A]

My understanding is that U.S. source income is "Compensation for labor or personal services performed in the United States." So it appears to me that Janet M. is correct about there being no U.S. source income. But is Janet M. correct about not being able to have salary deferrals from money that is not U.S. source income? Is it possible that the money that is not U.S. source income is still taxable in the U.S. and that therefore the employees may make salary deferral contributions?

Also, can anyone answer the ADP/ACP and coverage testing questions?

[jquazza]

Nonresident alien w/ no us source income are excludable from the coverage test.

What is this Canadian guy's advantage in making contributions to a US 401(k). The Canadian government is not going to give him a tax break for his contribution to the 401(k) (it is not Canadian qualified) and the US government will surely tax him when he takes a distribution. Don't they pay enough taxes in Canada already hey?

[JanetM]

Well I suppose you could have deferrals - but it would be stupid to do so. Canada will not recognize as tax deferred contributions. When withdrawn from Plan the amount will be taxed. No rollover is possible because US does not recognize Canadian plans as qualifed under ERISA.

Canadian income is not taxable in US if earned by Canadian citizen. If earned by US citizen it could be subject to foreign earned income exclusion - amount in excess of foreign earned income exclusion can be deferred and/or deducted on US tax return.

The question is - why would canadian want to contribute to US plan?

As canadians have no US source income they are excluded from coverage and ADP - if the plan document is written correctly. Look at plan, what is definition of eligible participant and eligible compensation?

[John A]

The Canadian employees have made "401(k) contributions" but they are not tax deferred contributions, so I have no idea why the Canadian employees are contributing. The plan document does NOT exclude nonresident aliens with no U.S. source income, so the employees are included in the plan. So does that mean these employees do have to be included in coverage and ADP testing (since they are not excluded under the plan document terms)?