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) The requester asks for information regarding how Canadian tax applies to withdrawals made from a Roth IRA where an election, to defer Canadian tax applies with respect to undistributed income accrued in the Roth IRA, is filed by a Canadian resident. (2) What are the advantages of filing such an election?
Position: (1) Under paragraph 1 of Article XVIII of the Convention, distributions from a Roth IRA to a resident of Canada generally are exempt from Canadian tax to the extent they would be excluded from U.S. taxable income if paid to a resident of the U.S. (2) The election under paragraph 7 of the Convention is of benefit to an individual as otherwise, the accrued income would be taxable to the individual under the Act on a current basis.
Reasons: (1) Article XVIII, paragraph 1 of the Convention (2) Article XVIII, paragraph 7 of the Convention.
March 12, 2013
Re: Taxation of Roth Individual Retirement Arrangement (IRA)
This is in response to your correspondence of January 20, 2013 wherein you requested information regarding how Canadian tax applies to withdrawals made from a Roth individual retirement arrangement ("IRA") where an election to defer Canadian taxation, with respect to undistributed income accrued in the Roth IRA, is filed by a Canadian resident. You have also inquired about the advantages of filing such an election.
The information provided in your correspondence indicates that you are an American citizen and a resident of Canada. You currently hold a Roth IRA and do not intend to make further contributions to the Roth IRA.
Written confirmation of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the internet (http://www.cra-arc.gc.ca/formspubs/menu-eng.html). Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.
The CRA provides guidance and additional information regarding the taxation of Roth IRAs in Income Tax - Technical News No. 43 (ITTN) and is available on our website.
A Roth IRA can be an individual retirement account (i.e. a custodial account or a trust) or an individual retirement annuity (i.e. an annuity contract or an endowment contract from a life insurance company). A Roth IRA is not a registered plan under the Income Tax Act (the "Act"), and income and distributions will therefore be taxed according to the rules that apply to custodial accounts, trusts, annuity contracts or endowment contracts. However, in many cases, Article XVIII of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (the "Convention") may apply to defer or relieve taxation in Canada.
Subparagraph 3(b) of Article XVIII of the Convention provides that the term "pensions" generally includes a Roth IRA, within the meaning of section 408A of the Internal Revenue Code. As a result, under paragraph 1 of Article XVIII of the Convention, distributions from a Roth IRA to a resident of Canada generally are exempt from Canadian tax to the extent they would be excluded from U.S. taxable income if paid to a resident of the United States.
Under paragraph 7 of Article XVIII of the Convention, a Canadian resident individual may elect to defer any taxation in Canada with respect to the income accrued in a Roth IRA until such time as and to the extent that a distribution is made from the plan. The election under paragraph 7 is of benefit to an individual as the accrued income would otherwise be taxable to the individual on a current basis. The ITTN outlines the procedures for making the election.
Subparagraph 3(b) of Article XVIII of the Convention provides that if a Canadian resident individual makes contributions to his or her Roth IRA while a resident of Canada, the Roth IRA will cease to be considered a "pension" for purposes of the Convention at the time of the contribution. If an election was filed by the individual, it will no longer be valid and all subsequent income earned or accrued in the Roth IRA will be subject to tax in Canada in the year it is earned or accrued.
We trust these comments are helpful.
Lita Krantz, CPA, CA
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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