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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1) Will an amount received from a taxpayer's deceased father's IRA be included in income for Canadian tax purposes? 2) Can a Canadian taxpayer take a deduction for foreign estate taxes paid by the taxpayer's deceased father's estate?
Position: 1) Yes. 2) No.
Reasons: 1) 56(1)(a)(i)(C.1) 2) Nothing in the Act to allow for the deduction.
January 17, 2001
ST. JOHN'S TAX CENTRE HEADQUARTERS
T1 Processing Review Section M.P. Sarazin, CA
(613) 824-5441
Attention: Olga Barnes
2000-006115
XXXXXXXXXX (the "Taxpayer")
We are writing in response to your facsimile of December 12, 2000, requesting our views regarding the taxation of amounts received by the Taxpayer from her deceased father's individual retirement account ("IRA").
Facts
From information provided in a letter from XXXXXXXXXX , to the Taxpayer's brothers, we understand that the Taxpayer's father died in or before XXXXXXXXXX . In the letter, the brothers were advised that the full value of the deceased father's IRA was subjected to U.S. federal estate taxes and the amounts eventually withdrawn from the IRA will be subject to income taxes. However, under the Internal Revenue Code, the brothers could claim a deduction for the estate taxes paid by the deceased father's estate in respect of the IRA as the amounts are withdrawn from the IRA and included in their U.S. taxable income. The letter also stated that the deduction may not apply to Canadian beneficiaries and the Canadian beneficiaries should seek qualified Canadian counsel in respect of amounts received out of the IRA.
In XXXXXXXXXX , the Taxpayer included $XXXXXXXXXX in income under clause 56(1)(a)(i)(C.1) of the Income Tax Act (the "Act"). The Taxpayer claimed a deduction for $XXXXXXXXXX , the withholding taxes on the IRA payment to a resident of Canada under the Canada-U.S. Tax Convention (1980) (the "Convention"). The Taxpayer also claimed a deduction under subsection 20(11) of the Act for a portion of the estate taxes paid by the Taxpayer's deceased father's estate in respect of the amounts paid out of the IRA to the Taxpayer.
You wrote to the Taxpayer on August 21, 2000 requesting support for the amounts claimed by the Taxpayer in respect of the amounts received out of the IRA. The Taxpayer's representative responded to your letter on October 30, 2000 stating that the amounts received out of the IRA were an inheritance and they should not have been included in the Taxpayer's income nor should there have been a claim for taxes paid in respect of these non-taxable amounts. In his letter dated November 29, 2000, the representative argued that the IRA income is not taxable in Canada because the amounts would not have been taxable in the United States.
IRAs established pursuant to subsection 408(a), (b) or (h) of the Internal Revenue Code of 1986 are prescribed to be "foreign retirement arrangements" ("FRA") for purposes of the Income Tax Act (the "Act"). A recipient is required to include all amounts received out of or under a FRA as a superannuation or pension benefit (whether lump-sum or periodic payment) in his or her income under the provisions of clause 56(1)(a)(i)(C.1) of the Act. This provision applies to all amounts received out of or under an FRA, including amounts received as a named beneficiary under the FRA. The amount of the payment to be included in the recipient's income is the gross amount, before U.S. withholding and any applicable penalty taxes, paid out of the IRA. The determination of whether this particular IRA is an FRA is a question of fact.
Generally, payments made out of IRAs to non-residents of the United States are subject to a non-resident withholding tax. This would be the case whether or not these amounts were previously taxed under the United States estate tax laws. In his letter to the Taxpayer's brothers, the CPA confirmed that payments from the IRA to U.S. residents would also be subjected to income taxes even though the amounts were previously taxed under the United States estate tax laws. In any event, foreign tax credits should be available to the Taxpayer for the $XXXXXXXXXX in income taxes withheld in the United States on amounts received and reported as income on her Canadian tax return.
Under paragraph 1 of Article XVIII of the Convention, pensions arising in the U.S. and paid to a resident of Canada may be taxed in Canada unless the amount would be excluded from taxable income in the United States if it were paid to a resident of the United States. The representative has argued that this paragraph applies to exclude the IRA payments from the Taxpayer's income in XXXXXXXXXX . The fact that a resident of the United States is entitled to claim a deduction for previous estate taxes paid in respect of amounts received out of an IRA does not result in the IRA payments being excluded from taxable income in the U.S. Consequently, paragraph 1 of Article XVIII of the Convention does not apply to exempt the IRA payments received by the Taxpayer from income taxes in Canada.
We note that subsection 20(11) allows a deduction for any income or profits tax paid by a taxpayer to the government of a country other than Canada in the year in respect of an amount that has been included in the taxpayer's income for that year. The Taxpayer is not eligible for this deduction in relation to the estate taxes because the estate taxes are not an income or profits tax, the estate taxes were not paid by the Taxpayer (paid by the Taxpayer's deceased father's estate) and the estate taxes were not paid in XXXXXXXXXX (the taxes were paid in XXXXXXXXXX or earlier).
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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