A US DB plan holds Canadian real estate

[katieinny]

A participant in a US defined benefit plan has Canadian real estate as an asset in the plan. He knows that if he takes the real estate out of the plan it will be a distribution for US tax purposes. But does anybody know what the tax consequences would be for Canada?

[masteff]

Is the participant in Canada too, or just the property?

(By the way, my glib response was going to be "property taxes". )

[katieinny]

Masteff: The participant is a US resident.

[J2D2]

A participant in a US defined benefit plan has Canadian real estate as an asset in the plan.

I must be a bit slow today. How would this situation come about?

[John Feldt ERPA CPC QPA]

Hmmm. I didn't think a US qualified plan could directly own foreign real estate, with an exception for Canada but only as long as the participants were citizens of the Canada. Perhaps this recollection is out-dated?

[masteff]

I must be a bit slow today. How would this situation come about?

I presume it's an investment in a self directed plan (more likely to occur in a Keogh than in 'traditional' pension plans).

Masteff: The participant is a US resident.

I suppose the other question I should ask is if there was Canadian earned income that was ever used in the plan?

Hmm, J4FKBC raises a potentially problematic issue w/ whether it was an allowed investment.

It's really a question for the Canadian tax service, but pension is in US, participant is in US, so no logical reason for taxation in Canada, but since when were taxes logical.

Participant will likely need an appraisal to value the distribution, which would establish his basis in the property.

Website with telephone number for inquiries from the US about Canadian taxes is here: http://www.cra-arc.gc.ca/contact/international-e.html That's really my best suggestion.

[David MacLennan]

The Canada exemption would not apply. Is this an ERISA plan? If not, perhaps the ERISA rules don't apply at all.

"Section 404(b) of ERISA provides that "[e]xcept as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States." Regulation 29 CFR §2550.404b-1(a)(2)(i) provides, in relevant part, that a fiduciary may maintain the indicia of ownership of certain plan assets outside the jurisdiction of the district courts of the United States if:

"such assets are under the management and control of a fiduciary which is a corporation or partnership organized under the laws of the United States or a State, which fiduciary has its principal place of business within the United States and which is --

(A) A bank as defined in section 202(a)(2) of the Investment Advisers Act of 1940 that has, as of the last day of its most recent fiscal year, equity capital in excess of $1,000,000. . . ."

And from the ERISA reg:

(b) Notwithstanding any requirement of paragraph (a) of this section, a fiduciary with respect to a plan may maintain in Canada the indicia of ownership of plan assets which are attributable to a contribution made on behalf of a plan participant who is a citizen or resident of Canada, if such indicia of ownership must remain in Canada in order for the plan to qualify for and maintain tax exempt status under the laws of Canada or to comply with other applicable laws of Canada or any Province of Canada.

[jpod]

Excuse my ignorance, but Katieinny said that "A PARTICIPANT in a US defined benefit plan has Canadian real estate as an asset in the plan." How does that work?

[jpod]

David MacLennon: Is it clear that the indicia of ownership of real estate is not in the US? What if the plan trustee is located in the US and the deed to the property is in the name of and held by the trustee in the US?

[David MacLennan]

Jpod, probably either a one-participant DB plan, or a rollover account in the DB plan.

[David MacLennan]

David MacLennon: Is it clear that the indicia of ownership of real estate is not in the US? What if the plan trustee is located in the US and the deed to the property is in the name of and held by the trustee in the US?

I'm not an attorney, but it seems that with real property the physical location of the deed is not material, since US Courts would not have jurisdiction over seizure of the property, etc. . .

[katieinny]

David: As you surmised, this is a one person DB plan. I don't know the whole story about why he wanted to put the Canadian property into the plan, but what goes in must come out, and he's decided that now's the time.

[jpod]

The indicia of ownership issue now appears to be a moot point, because if this is truly a 1-participant plan covering only the owner, the plan is not subject to ERISA.

For what it's worth, however, resolution of the issue of whether a deed to Canadian real estate qualifies as sufficient "indicia of ownership" will hinge on the application of Canadian law. For example, if the pertinent laws governing title to real estate in Canada are similar to the treatment in common law states of the US, then I would think a valid deed is sufficient "indicia of ownership."

Getting back to the original question, I can't imagine how the distribution of legal ownership of Candian real estate by a US trust to a US citizen who is not a resident of Canada could be an event triggering a Canadian tax, income or otherwise. Maybe a transfer tax or something like that, but all one would have to do is contact the responsible taxing authorities in Canada and ask the question.

[masteff]

At risk of repeating myself...

It's really a question for the Canadian tax service, but pension is in US, participant is in US, so no logical reason for taxation in Canada, but since when were taxes logical.

Participant will likely need an appraisal to value the distribution, which would establish his basis in the property.

Website with telephone number for inquiries from the US about Canadian taxes is here: http://www.cra-arc.gc.ca/contact/international-e.html That's really my best suggestion.

[Guest mjb]

Under the IRC if the qualfied plan owns Canandian RE the deed must be held by the plan in a domestic trust subject to US law. The only requirement is that the deed be issued to the US trustee. This applies to both ERISA and non ERISA plans.

whether the sale of canadian RE by the trust is subject to canadian income tax is determined by Canadian law.

[JAY21]

mjb, would that also apply to land in Mexico ? Any specific cite for that as I have a client (non-ERISA plan) wanting to do that same thing with land in mexico and willing to do a domestic trust I suspect.

[AndyH]

Hmmm. I didn't think a US qualified plan could directly own foreign real estate, with an exception for Canada but only as long as the participants were citizens of the Canada. Perhaps this recollection is out-dated?

What then am I to do with my moon rock collection in my brokered 401(k)?

[SoCalActuary]

What then am I to do with my moon rock collection in my brokered 401(k)?

Are the native Moonies going to sue to reclaim their sacred emblems?

[John Feldt ERPA CPC QPA]

AndyH

Are you saying that after landing on the moon first, we failed to properly file this as a US property? Man.