12 April 1985 Income Tax Severed Letter A-1093 - []

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.

E. Wayne Hood (613) 993-7295

XXXX

April 12, 1985

INDEXED

Dear Sirs:

This is in reply to your letter of February 8 concerning the Canada- U.S. Income Tax Convention (1980).

You advise that you are involved with administering registered employee pension plans (RRSP's) on behalf of employers, and request our opinion on the withholding tax requirements where the following types of payments from the plans are made to residents of the United States (U.S.).

1. Pension paid on a periodic basis.

2. Commuted value of pension paid to U.S. beneficiary on annuitant's death.

3. Lump sum refund on termination of employment or commuted value paid to annuitant.

We provide the following comments.

1. Periodic Pension

The new Convention, Article XVIII, provides that pensions may be taxed in the contracting State in which they arise and according to the laws of that State. Paragraph 212(1)(h) of the Income Tax Act provides for a 25% withholding tax on pension payments to non- residents. The new Convention provision, however, further provides that the rate of withholding, where periodic pension payments are made, shall not exceed 15% of the gross amount of payments made after October 1, 1984. However, the old Convention, Article VIA, exempted such periodic payments from withholding tax. Accordingly, pursuant to the greater relief provisions of the new Convention, Article XXX, the 15% withholding requirement will not be effective until January 1, 1986, and Article VIA of the old Convention will prevail with respect to periodic pension payments made before January 1, 1986.

It should be noted that a particular non-resident may be exempt from the tax imposed by paragraph 212(1)(h),when the pension payments are attributable to services rendered by the taxpayer for taxation years at no time during which he was resident in Canada and during which he was not employed, or was only occasionally employed, in Canada. In this regard, we enclose a copy of Interpretation Bulletin, IT-77R .

2 & 3. Commuted value to Beneficiary or Lump Sum to Annuitant

The new Convention does not limit the tax to 15% on lump sum payments. The rate will however be 15% for such payments made before January 1, 1986 because of the greater relief provision. While Article VIA of the old Convention does not exempt lump sum payments, Article XI of that Convention does provide for a 15% withholding rate.

Again, consideration should be given to the exception provisions of paragraph 212(1)(h) of the Act. Where a lump sum payment is taxable by virtue of 212(l)(h), the rate of withholding will be 25% for payments made on or after January 1, 1986.

We hope our comments will be useful to you.

Yours truly,

for Director Non-Corporate Rulings Division