Income Tax Severed Letters

Principal Issues: (1) Where the surviving spouse or common-law partner (the “Spouse”) is designated as beneficiary of the deceased’s Roth IRA, does subsection 70(5) applies to deem a disposition of the property held in the deceased’s Roth IRA at fair market value as at the date of death, subject to the rollover provision in subsection 70(6)? (2) Do the tax consequences differ if the deceased taxpayer filed an election under Article XVIII(7) of the Treaty? (3) Is the Spouse required to file an election under Article XVIII(7) of the Treaty after a spousal contribution as a consequence of death? (4) Does Article XVIII(1) of the Treaty apply to exempt withdrawals from the Spouse’s Roth IRA from taxation in Canada if they would be excluded from taxable income in the U.S, were the recipient a resident there?

Position: (1) Likely. (2) Yes. (3) Recommended. (4) Generally yes.

Reasons: (1) Question of fact and law. However, subsection 70(6) would likely apply in this case. (2) If a valid election under Article XVIII(7) was filed, the accrued gain would be added to the capital of the Roth IRA with no immediate consequences to the deceased taxpayer. (3) The Spouse should file an election under Article XVIII(7) of the Treaty to defer Canadian income tax on income accrued in his or her Roth IRA after a spousal contribution. (4) Question of fact.