CRA publishes its position on the Treaty exemption for Roth IRA income and distributions

Comments of CRA in its new Folio on Roth IRAs include:

  • A Roth IRA does not enjoy the income tax deferral benefits afforded under the Act to Canadian registered plans and traditional IRAs, so that (absent an election under Art. XVIII of the Canada-U.S. Treaty), the income accrues in the Roth IRA to a Canadian resident on a current, annual basis.
  • In particular, although CRA would generally expect a Roth IRA that was a trust for the benefit of an individual resident in Canada to be exempted from the s. 94 rules as an exempt foreign trust, the individual (sole) beneficiary will be required to recognize the trust’s foreign accrual property income under ss. 94.2 and 95.
  • A resident individual can file an election under Art. XVIII(7) to defer taxation in Canada respecting undistributed income accruing in a Roth IRA.
  • A distribution from a Roth IRA to the individual generally is not taxable in Canada under Art. XVIII(1) to the extent that the Roth IRA qualifies as a pension – which will generally be the case except to the extent the individual contributes to the Roth IRA while a resident.
  • CRA notes that the effect of such a “Canadian Contribution” is to split a Roth IRA into two parts – one part consisting of the balance in the Roth IRA immediately before the Canadian Contribution and the other part consisting of the Canadian contribution (and any subsequent contributions) and all income accrued in the Roth IRA after the Canadian Contribution. The first part continues to be considered a pension and remains exempt from taxation in Canada (if an election had been filed). The second part ceases to be considered a pension and becomes subject to Canadian taxation.
  • A Canadian Contribution does not include a contribution made before 2009, or a rollover contribution from another Roth IRA or a Roth 401(k) arrangement – but does include a conversion from a traditional IRA, or from a qualified retirement plan (such as a traditional 401(k) or profit sharing plan), to a Roth IRA.
  • The election should be filed on or before the individual’s filing-due date for the tax year in which the individual became resident in Canada.
  • No T1135, T1141, T1142 or T1134 reporting is required for a Roth IRA if the election has been made, and no Canadian Contribution has been made.

Neal Armstrong. Summaries of Income Tax Folio S5-F3-C1, Taxation of a Roth IRA under s. 56(1)(a)(i)(C.1), s. 94.2(1), Treaties – Income Tax Conventions – Art. 18 and s. 233.3(3).