CRA indicates that a Canadian resident may access the Art. XVIII Treaty exemption re his 401(k) plan by renouncing his US citizenship then collapsing his plan

Shortly after renouncing his U.S. citizenship, a Canadian resident fully collapsed his IRA and 401(k) plan, so that all funds were distributed to him.

Under the U.S. tax rules, by virtue of the expatriation, he was treated as having received a distribution of his entire interest in the IRA, and of the present value of his 401(k) plan, the day before the expatriation date, resulting in an income inclusion for such purposes. The subsequent collapse of the plans did not result in an income inclusion for such purposes to the extent the amounts had been subject to tax on expatriation.

CRA indicated that the deemed distribution for U.S. purposes of his entire interest in the IRA upon expatriation resulted in a corresponding deemed receipt in his income under s. 56(12) and that, by virtue of the exclusion to this effect in s. 56(1)(a)(i)(C.1), on the subsequent actual distribution there was no inclusion under s. 56(1)(a)(i) to the extent that the amount was not taxed in the U.S.

There was no ITA income inclusion upon expatriation regarding the 401(k) plan which (unlike the IRA) was not a “foreign retirement arrangement,” but there was an income inclusion pursuant to s. 56(1)(a)(i) in respect of a “superannuation or pension benefit” on the distribution. However, to the extent that the distribution would have been excluded from taxable income in the U.S. were he a resident thereof, Art. XVIII(1) of the Canada-US Treaty would provide relief from tax for the same amount in Canada.

Neal Armstrong. Summary of 6 December 2023 External T.I. 2017-0735631E5 under s. 56(1)(a)(i).