AMENDED
REASONS FOR JUDGMENT
D’Auray J.
I. INTRODUCTION
[1]
Susanne McKenzie has brought an appeal in regards
to a Notice of Reassessment for the 2011 taxation year. The Minister of
National Revenue (the "Minister") reassessed the appellant to
include an amount of $21,740
in the appellant’s income. This amount was paid to the appellant from a US
individual retirement account ("US IRA") that the appellant inherited
from her mother, Betty Ann Wicks, who passed away in 2007.
[2]
In his submissions to the Court and written
representations,
the appellant’s representative acknowledged that clause 56(1)(a)(C.1)
of the Income Tax Act
(the "Act") would apply in respect of withdrawals from
the US IRA. However, it is his position that there is an alternative taxing
mechanism for the US IRA for Canadian income tax purposes. It is the appellant’s
view that given that the US IRA is held in a custodial arrangement, it is not a
separate legal entity. For the appellant, the US IRA is nothing more than a
bundle of securities, which are capital property. The appellant also asserted
that there is double taxation, with the result that subsection 248(28) of
the Act should apply.
II. FACTS
[3]
The parties filed an Agreed Statement of Facts
on January 24, 2017, which is set out below.
AGREED
STATEMENT OF FACTS
1. The Appellant and the Respondent
agree, for the purposes of this appeal only, and any appeal therefrom, that the
following facts are true. The parties are free to make submissions with respect
to, and are not to be taken as agreeing to, the degree of relevance or weight
to be attributed to these facts.
2. This agreement shall not bind the
parties in any other action; may not be used against either party or any other
occasion; and may not be used by any other party.
The Appellant and the Respondent have agreed
to the following facts:
3. The issue in the appeal is
whether there is an alternate taxing mechanism other than Section 56(1)(a)(i)(C.1)
of the Income Tax Act to tax a US IRA and whether the issue of double
taxability as enunciated in Section 248(28)(a) of the Income Tax Act is
applicable in this context.
4. The Appellant is a Canadian
resident for tax purposes and she is also a citizen of the United States of
America (US).
5. The Appellant’s mother Betty Ann
Wicks who was a resident and also a US citizen died in 2007.
6. The Appellant received the amount
of $21,740 CAD ($21,979 USD X 0,9891) in the 2011 taxation year which was
included in her US individual income tax return.
[…]
7. The $21,740 CAD was received as a
distribution of the Appellant’s mother’s individual retirement account (the “US
IRA”), which named the Appellant as the beneficiary.
8. The documents provided to the
Appellant by Morgan Stanley Smith Barney for the purpose of reporting income to
the United States Government, referred to as form 1099-R, reported that
the Appellant received taxable pension income for an amount of $21,979 qualified
has code 4 death distribution “to indicate payment to a decedent’s
beneficiary”.
[…]
9. The amount of $21,979 USD was
taxed in the US.
10. The Appellant did not include the
amount of $21,740 CAD in her 2011 Canadian income tax return.
11. The Minister reassessed the
Appellant on February 22, 2013, to include “US pension” in the amount of
$21,740 CAD in computing the Appellant’s income for the 2011 taxation year […]
and also to allow a foreign tax credit of $3,296.85 CAD relating to the US
income taxes paid on the amount distributed from the US IRA to the Appellant.
12. The Minister confirmed the
reassessment on February 12, 2016, on the basis that the “US pension [the
Appellant] received in 2011 must be included in [the Appellant’s] income
according to paragraph 56(1)(a)(i)(C.1)”.
[…]
13. The US IRA was an US IRA custodial
account which was established between the Appellant’s mother and the Citigroup
Global MKTS Inc.
14. The $21,740 CAD was paid to the
Appellant in a lump-sum.
III. ISSUES
[4]
The parties raised the following two questions
to be addressed:
a) Whether there is an alternate taxing mechanism for a US IRA, other
than clause 56(1)(a)(C.1) of the Act; and
b) Whether subsection 248(28) of the Act is applicable.
IV. POSITION OF THE PARTIES
A. Appellant’s
Position
[5]
The appellant has two main arguments: (i) the US
IRA should receive capital treatment, and (ii) there is double taxation for
Canadian income tax purposes and accordingly, subsection 248(28) of the Act
is applicable to prevent such double taxation.
[6]
It is the appellant’s position that there are
two approaches for taxing US IRAs for Canadian income tax purposes and that the
Act provides the taxpayer with the discretion to choose which of the two
methods should apply. The appellant’s view is that US IRAs may be treated as an
inherited portfolio of securities. Under this approach, capital gains would
dominate and investment income earned within the US IRA would be taxable. The
second approach would be to treat withdrawals from a US IRA as income from a
unique source of income under clause 56(1)(a)(i)(C.1) of the Act.
[7]
The appellant’s position is based on the
assertion that the US IRA, as a custodial arrangement, is not a trust and is
not deemed to be a trust for Canadian income tax purposes.
[8]
The appellant is of the view that it is not
because subsection 408(h) of the United States’ Internal Revenue Code ("US Internal Revenue Code"),
states "a custodial account shall be treated as a trust…"
that a custodial account will be treated as a trust for Canadian income tax
purposes. In the appellant’s view, this wording is not equivalent to stating
that a custodial account is deemed to be a trust for Canadian income tax
purposes.
[9]
In addition, the appellant submitted that there
are specific requirements that must be met under subsection 408(a) of the US
Internal Revenue Code, and in her view, the requirements under subsection
408(a) have not been met; namely there is no evidence that the US IRA is a
trust nor is there evidence of a trust indenture or document creating the US
IRA.
[10]
The appellant also argued that there is double
taxation and therefore, subsection 248(28) of the Act should apply
to prevent a double inclusion. In her Notice of Appeal, the appellant submitted
that due to the expansive definition of the term "taxpayer" in
subsection 248(1),
the appellant’s mother was subject to a deemed disposition upon her death in
2007 pursuant to subsection 70(5) of the Act. As the withdrawals
from the US IRA would also be subject to Canadian tax under clause 56(1)(a)(i)(C.1),
the result is double taxation.
B. Respondent’s Position
[11]
The respondent’s position is that the amount
received by the appellant from the US IRA is taxable in Canada pursuant to
clause 56(1)(a)(i)(C.1) of the Act and therefore, paragraph 39(1)(a)
of the Act is not applicable. The respondent also submitted that the
appellant’s alternative taxing mechanism argument is not supported by any
provision of the Act or by case law.
[12]
The respondent submitted that the US IRA is a
"foreign retirement arrangement" as defined in subsection 248(1)
of the Act and section 6803 of the Income Tax Regulations (the "Regulations").
Specifically, the respondent submitted that subsection 248(1) defines a
"foreign retirement arrangement" as a prescribed plan or arrangement,
which is described in section 6803 of the Regulations as a plan or
arrangement to which subsection 408(a), (b) or (h) of the US Internal
Revenue Code applies.
[13]
The respondent’s position is that the
appellant’s US IRA falls within the ambit of subsection 408(h) of the US
Internal Revenue Code, as a custodial account.
[14]
According to the respondent, an entity that is
not a bank and that requests to be approved as a nonbank trustee or custodian
must meet the requirements of the Code of US Federal Regulations. The respondent submitted that
since 2010, Morgan Stanley Smith Barney ("Morgan Stanley") has been
approved by the Commissioner of Internal Revenue as a nonbank trustee or
custodian for purposes of section 408 of the US Internal Revenue Code.
Further, the respondent noted that Citigroup Global MKTS Inc.
("Citigroup") has also been approved by the Commissioner as a nonbank
trustee or custodian since 1985.
[15]
The respondent also stated that the exception in
clause 56(1)(a)(i)(C.1) does not apply since the pension income
received as a lump sum was taxable in the US as it was included in the
appellant’s US individual income tax return for 2011. As a result, the amount
of $21,740 was properly included in the appellant’s Canadian income tax return for
the 2011 taxation year.
[16]
In her submissions to the Court, the respondent
referred to the decisions Jagmohan Singh Gill v R and Kaiser v R, stating that these cases
provide a good explanation of the application of clause 56(1)(a)(i)(C.1).
However, as noted by the respondent, neither of these cases dealt with the
appellant’s argument; namely, the alleged alternative taxing mechanism.
[17]
In the case Kaiser, the taxpayer was a US
citizen resident in Canada. The taxpayer received, as beneficiary of his
deceased father’s estate, a sum from his father’s US IRA. The issue in this
case was whether the sum was properly included in the taxpayer’s income
pursuant to clause 56(1)(a)(i)(C.1). The taxpayer argued that the
amounts should only be included under this clause if they constituted
superannuation or pension benefits.
Justice Rowe rejected this approach, concluding that the amount should be
included in the taxpayer’s income based on a plain reading of the provision. On this point, Justice Rowe
stated the following:
[…] To be taxable in this instance, the
important qualification is that the funds represent an amount of any payment
out of or under that foreign retirement arrangement, not that the amount is
received by a particular person only under circumstances to which the statutory
and common law definitions of "superannuation and pension benefit"
apply.
[18]
In Gill, Justice Hogan was concerned with
payments received by a taxpayer in a situation similar to the present appeal.
The taxpayer in Gill was the beneficiary of his deceased sister’s US IRA.
The taxpayer’s sister was a citizen of the United States. In the 2005 taxation
year, the taxpayer received a lump sum amount on the redemption of the US IRA.
The issue was whether the Minister properly included the amount received from
the US IRA in the taxpayer’s income pursuant to clause 56(1)(a)(i)(C.1).
[19]
The taxpayer in Gill argued that the
words "without limiting the generality of the foregoing" in
subparagraph 56(1)(a)(i) were indicative of Parliament’s intention
that the "items listed in clauses (A) to (C.1) should be taxed only if
they constitute superannuation or pension benefits as those terms are generally
understood."
Justice Hogan noted the broadness of the language of clause 56(1)(a)(i)(C.1). In dismissing the taxpayer’s
appeal, Justice Hogan commented that nothing in the wording of this clause
suggests "the payment must fit within the common law definition of
superannuation or pension benefit in order for it to be included in
income."
V. ANALYSIS
A. Foreign Retirement Arrangement
[20]
The relevant provision in this appeal is clause 56(1)(a)(i)(C.1)
of the Act. The Act sets out a specific scheme for the taxation
of amounts from arrangements such as the US IRA. The appellant’s argument of an
alternate taxing mechanism with respect to the US IRA is not persuasive and
cannot stand.
[21]
Section 56 of the Act provides for
the inclusion of certain amounts in a taxpayer’s income. Subparagraph 56(1)(a)(i)
enumerates certain benefits that are to be included in income as superannuation
or pension benefits.
[22]
Clause 56(1)(a)(i)(C.1) of the Act,
in particular, states that "any payment out of or under a foreign
retirement arrangement established under the laws of a country" will be
included in computing the income of the taxpayer for a taxation year. There is
an exception to this inclusion that applies where the amount would not be
subject to income tax in the country in which the foreign retirement
arrangement is established (in this appeal, the United States) if the taxpayer
were resident in that country. Specifically, the clause provides as follows:
56.(1) Amounts to be included in income for
the year - Without restricting the generality of section 3, there shall be
included in computing the income of a taxpayer for a taxation year
(a) pension
benefits, unemployment insurance benefits, etc. - any amount received by the
taxpayer in the year as, on account or in lieu of payment of, or in
satisfaction of,
(i) a
superannuation or pension benefit including, without limiting the
generality of the foregoing,
[…]
(C.1) the amount of any payment out
of or under a foreign retirement arrangement established under the laws of a
country, except to the extent that the amount would not, if the
taxpayer were resident in the country, be subject to income
inclusion in the country.
[Emphasis added.]
[23]
Subsection 248(1) of the Act defines a
"foreign retirement arrangement" as:
“Foreign
retirement arrangement’ means a prescribed plan or arrangement.
[Emphasis added.]
[24]
For the purpose of the definition of
"foreign retirement arrangement" in subsection 248(1) of the Act,
section 6803 of the Regulations states that:
A prescribed plan or arrangement is a
plan or arrangement to which subsection 408(a), (b) or (h) of the US
Internal Revenue Code applies."
[Emphasis added.]
[25]
Section 408 of the US Internal Revenue Code
deals with US IRAs. The relevant sections are 408(a) and 408(h). It reads as
follows.
Sec 408.
Individual Retirement Accounts
[Sec.
408(a)]
(a) Individual Retirement Account - For
purposes of this section, the term "individual retirement account" means
a trust created or organized in the United States for the exclusive benefit of
an individual or his beneficiaries, but only if the written governing
instrument creating the trust meets the following requirements:
(1) Except in the
case of a rollover contribution described in subsection (d)(3), in
section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), no contribution will
be accepted unless it is in cash, and contributions will not be accepted for
the taxable year on behalf of any individual in excess of the amount in effect
for such taxable year under section 219(b)(1)(A).
(2) The trustee is
a bank (as defined in subsection (n)) or such other person who demonstrates to
the satisfaction of the Secretary that the manner in which such other person
will administer the trust will be consistent with the requirements of this
section.
(3) No part of the
trust funds will be invested in life insurance contracts.
(4) The interest
of the trust will not be commingled with other property except in a common
trust fund or common investment fund.
(6) Under
regulations prescribed by the Secretary, rules, similar to the rules of
section 401(a)(9) and the incidental death benefit requirements of
section 401(a) shall apply to the distribution of the entire interest of
an individual for whose benefit the trust is maintained.
[Sec.
408(h)]
(h) Custodial
Accounts - For purposes of this section, a custodial account shall be treated
as a trust if the assets of such account are held by a bank (as defined in
subsection (n)) or another person who demonstrates, to the satisfaction of the
Secretary, that the manner in which he will administer the account will be
consistent with the requirements of this section, and if the custodial account
would, except for the fact that it is not a trust, constitute an individual
retirement account described in subsection (a). For purposes of this title, in
the case of a custodial account treated as a trust by reason of the preceding
sentence, the custodian of such account shall be treated as trustee thereof.
[26]
It is clear that the exception in clause 56(1)(a)(i)(C.1)
of the Act does not apply in this appeal, since the appellant was
subject to income tax in the US on the pension income. This is admitted by both
parties in the Agreed Statement of Fact. It is also confirmed by
Form 1099-R
which the appellant filed with her US Income Tax Return. On that form, it is
indicated that the appellant received taxable pension income in the amount of
$21,979 USD.
[27]
When I read clause 56(1)(a)(i)(C.1) of
the Act in conjunction with section 248(1) that defines a “foreign
retirement arrangement” as a prescribed plan or arrangement, and whereby section
6803 of the Regulations states that for the purposes of the definition,
a “foreign retirement plan” in subsection 248(1) is a prescribed plan or
arrangement to which subsection 408(a), (b) or (h) of the US Internal
Revenue Code applies, I come to the conclusion that the amount received by
the appellant is taxable under clause 56(1)(a)(i)(C.1) for the following
reasons.
[28]
In my view, the appellant ignores the wording of
section 6803 of the Regulations, stating that a foreign retirement plan
is a plan or an arrangement for which section 408(a), (b) or (h) of the US
Internal Revenue Code applies. In addition, the appellant misinterprets subsections
section 408(a) and (h) of the US Internal Revenue Code.
[29]
Under subsection 408(a) of the US Internal
Revenue Code, the term “individual retirement account” (“US IRA”) means a
trust created or organized in the United States for the exclusive benefit of an
individual or his beneficiaries if the written governing instrument creating
the trust meet certain requirements.
[30]
However, subsection 408(h) of the US Internal
Revenue Code states that a custodial account shall be treated as a trust if
the assets of such account are held by a bank (as defined in subsection (n)) or
another person who demonstrates, to the satisfaction of the Secretary, that the
manner in which he will administer the account is consistent with the
requirements of this section.
[31]
At the hearing, the appellant stated that the
custodial account was not held by a bank or by a person approved by the
Secretary as contemplated by subsections 408(h) and 408(n) of the US
Internal Revenue Code. I therefore asked the respondent whether Morgan Stanley
qualified as a bank under subsection 408(n) or was "another person
who demonstrates, to the satisfaction of the Secretary, that the manner in
which he will administer the account is consistent with the requirements of
this section…" Although the question was posed in respect of Morgan
Stanley, the evidence suggests that it should also have been asked with respect
to Citigroup. According to the Agreed Statement of Facts, the US IRA was
established between the appellant’s mother and Citigroup.
[32]
The respondent provided written representations
with respect to both Morgan Stanley and Citigroup’s status. The respondent
referred to an Internal Revenue Service Announcement 2011-59 (the
“Announcement”) whereby a list of nonbank trustees and nonbank custodians were
approved for the purposes of the regulations, including the ones pertaining to
individual retirement accounts. Pursuant to this announcement, both Citigroup
(approval date of July 22, 1985) and Morgan Stanley (approval date of January 27,
2010) are listed as approved nonbank trustees or custodians for the purposes of
section 408 of the US Internal Revenue Code. The respondent also
provided a list effective as of February 2, 2016, in which Citigroup
and Morgan Stanley are listed.
[33]
Therefore, this condition of subsection 408(h)
of the US Internal Revenue Code is met.
[34]
Although the appellant agreed that the US IRA was
a custodial account, she submitted that subsection 408(h) of the US Internal
Revenue Code did not apply, since the conditions of subsection 408(a) were
not met, namely that there was no evidence of trust indenture or instrument.
[35]
I have difficulty with the appellant’s position.
Subsection 408(h) of the US Internal Revenue Code states that a
custodial account shall be treated as a trust if the assets of such account
are held by an approved person, and if the custodial account would, except
for the fact that it is not a trust, constitute an individual retirement
account described in subsection 408(a). Accordingly, since the custodial
account is not a trust, there is no need for a trust indenture or instrument as
submitted by the appellant.
[36]
In this appeal, the custodial account was held
by Citygroup which was a person authorized to administer the custodial account
under section 408 of the US Internal Revenue Code. In addition, the
custodial account constituted an individual retirement account for the
exclusive benefit of an individual or his beneficiaries as described in
subsection 408(a) of the US Internal Revenue Code. Therefore, the
conditions of subsections 408(a) and (h) are met. The factual situation of this
appeal is what is contemplated by subsections 408(a) and 408(h) of the US
Internal Revenue Code and section 6803 of the Regulation and clause 56(1)(a)(i)(C.1)
of the Act.
[37]
In addition, the burden was on the appellant to
establish that the conditions in paragraphs 408(a)(1) to (6) of the US
Internal Revenue Code were not met. She did not lead any evidence to prove
that these conditions were not met.
[38]
I do not agree with the appellant that there is an
alternative method for recording income, namely that the US IRA inherited by
the appellant from her mother be treated as an investment portfolio (capital
property) and that a capital gain should be included in her income pursuant to
subsection 39(1) of the Act, upon the disposition of the shares by the
appellant or that a deemed disposition occurred when the appellant inherited
the US IRA from her mother pursuant to subsection 70(5) of the Act.
[39]
The Act, more particularly clause
56(1)(a)(i)(C.1), section 6803 of the Regulations and
subsections 408(a) and 408(h) of the US Internal Revenue Code deals specifically
with the situation at bar. In addition, subsection 70(5) of the Act does
not apply in this appeal, since 70(5) (capital property of a deceased taxpayer)
applies to residents of Canada only. The appellant’s mother, Betty Ann Wicks,
was not a resident of Canada; therefore there was no deemed disposition for
Canadian income tax purposes under the Act upon her death.
[40]
Accordingly, the amount of $21,740 received by
the appellant as a distribution from her mother’s US IRA is taxable under
clause 56(1)(a)(i)(C.1) of the Act.
B. Double Taxation
[41]
The appellant argued that subsection 248(28)
of the Act is applicable. This provision provides that, without a
contrary intention, no provision of the Act shall be read to result in
the double counting of inclusions or deductions. Subsection 248(28)
specifically states the following:
248(28) Limitation respecting inclusions,
deductions and tax credits - Unless a contrary intention is evident, no
provision of this Act shall be read or construed
(a) to
require the inclusion or permit the deduction, either directly or indirectly,
in computing a taxpayer’s income, taxable income or taxable income earned in
Canada, for a taxation year or in computing a taxpayer’s income or loss for a
taxation year from a particular source or from sources in a particular place,
of any amount to the extent that the amount has already been directly or
indirectly included or deducted, as the case may be, in computing such income,
taxable income, taxable income earned in Canada or loss, for the year or any
preceding taxation year;
[…]
[42]
For subsection 248(28) of the Act to
apply, the appellant would have to prove that there was an inclusion in her
income of an amount and that such amount has already been directly or
indirectly included in computing her income.
[43]
The position of the appellant is stated in
paragraph 25 of her written submissions:
Given that a
disposition of securities and its correspondent withdrawal of funds leads to
double taxation, (Section 70(5)(a) and (b) and Subsections 56(1)(a)(C.1) of the
Income Tax Act), our position is that Subsection 248(28) of the Income Tax Act
would receive application by requiring the de-activation of an otherwise
applicable tax provision.
[44]
Subsection 70(5) of the Act deals with
the capital property of a deceased taxpayer. Pursuant to subsection 70(5) the
deceased taxpayer shall be deemed to have disposed of each capital property and
received proceeds of disposition equal to the fair market value of the property
before the death.
[45]
As I stated earlier, subsection 70(5) of the Act
is not applicable in this appeal. The appellant’s mother, Ms. Wicks, was not a
resident of Canada. She was a resident and citizen of the United States. The
appellant’s mother would not have been subject to a deemed disposition pursuant
to subsection 70(5) as this provision does not apply to non-resident person.
[46]
The tax liability of a person resident in Canada
is set out in subsection 2(1) of the Act. Subsection 2(3)
describes a non-resident person’s tax liability and states:
2(3) Tax payable by non-resident persons -
Where a person who is not taxable under subsection (1) for a taxation year
(a) was
employed in Canada,
(b) carried
on a business in Canada, or
(c)
disposed of a taxable Canadian property,
at any time in the year or a previous year,
an income tax shall be paid, as required by this Act, on the person’s taxable
income earned in Canada for the year determined in accordance with Division
D.
[Emphasis added.]
[47]
Notably, Division D of the Act is
entitled "Taxable Income Earned in Canada by Non-Residents" and
begins with section 115 of the Act. Subsection 70(5) did not apply
to the mother of the appellant since she was not a Canadian resident.
[48]
The appellant was correctly assessed by the
Minister; clause 56(1)(a)(i)(C.1) of the Act is the applicable
provision in this appeal. As it was stated in the Agreed Statement of Facts,
the Minister allowed a foreign tax credit of $3,296.85 CAD relating to the US
income tax paid on the amount distributed from the US IRA to the appellant.
VI. CONCLUSION
[49]
The appeal is dismissed with costs.
These Amended
Reasons for Judgment are issued in substitution of the Reasons for Judgment
dated April 5th 2017.
Signed at Ottawa,
Canada, this 5th day of June 2017.
“Johanne D’Auray”
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