28 February 2002 External T.I. 2001-0076625 - Pension Distr. to a Canadian Beneficiary

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether U.S. estate tax is deductible or creditable in respect of a lump-sum pension payment received by a beneficiary as a consequence of death of another person?

Position: No.

Reasons: The estate tax is not an income or profit tax and there is no provision in the Income Tax Act or the Canada-United States Income Tax Convention to allow for such deduction or credit.

XXXXXXXXXX 2001-007662
S. Leung
February 28, 2002

Dear XXXXXXXXXX:

Re: Pension Distribution

This is in reply to your facsimile transmission of March 25, 2001, in which you requested our view on the tax treatment of a pension distribution received by a taxpayer who is a U.S. citizen resident in Canada as a result of her being the designated beneficiary under a pension plan following the death of the pension plan holder who was her father and who was also a U.S. citizen ("Father"). We apologize for the delay in responding.

In your facsimile transmission, you indicated that the pension plan was a defined benefit plan of the U.S. at the death of Father. The taxpayer, as a designated beneficiary of the pension plan, received a distribution from the plan and a U.S. information slip 1099-R showing the gross amount of the pension distribution where such amount was fully taxable in the U.S. A certain amount of U.S. estate tax related to the fair market value of the pension plan at the date of death of Father has been paid. The taxpayer was allowed for U.S. income tax purposes to claim a deduction of the amount of such estate tax in computing her income in the U.S.

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

The information you provided is very sketchy and there are many issues that need clarification. For example, it is not clear who was liable to the U.S. estate tax related to the lump-sum pension amount received by the taxpayer: the taxpayer or the estate?

Who actually paid the estate tax related to the value of the pension plan? If the estate was liable for the estate tax, why did the taxpayer get the deduction from her income for U.S. tax purposes? If, on the other hand, the taxpayer was liable, why was she responsible to pay the estate tax which is supposed to be a tax on the value of the estate at the time of death of Father? What amount did the taxpayer receive from the pension plan: the gross amount before U.S. estate tax or the net amount after such tax? The U.S. 1099-R information slip seems to indicate that it was the pension plan which distributed the funds directly to the taxpayer without going through the estate. If this is true, can it be safely assumed that the amount was not a distribution from the estate?

Since you indicated that the pension plan was a defined benefit plan, it is therefore our understanding that it was not a foreign retirement arrangement defined under subsection 248(1) of the Income Tax Act (the "Act"). Hence, clause 56(1)(a)(i)(C.1) of the Act would not apply. However, a lump-sum pension payment would generally be taxable under subparagraph 56(1)(a)(i) of the Act in the hands of the taxpayer who received such distribution from the plan. This is consistent with the U.S. tax treatment noted above. The amount taxable in Canada, as in the U.S., would be the gross amount of the lump-sum payment (i.e., before any deduction of the estate tax related to such pension). However, unlike in the U.S., in Canada there is no deduction for the estate tax against such gross income as explained below. Since you have indicated that this is a $200,000 taxable distribution in the U.S., we assume paragraph 1 of Article XVIII of the Canada-United States Income Tax Convention (the "Convention") would maintain Canada's right to tax the full amount of the lump-sum payment.

Since the estate tax is not an income or profit tax, even if the tax were paid by the taxpayer instead of by the estate, it would not be creditable under the foreign tax credit regime in Canada. The estate tax is not deductible under subsection 20(12) of the Act because, firstly, it is not a non-business income tax as it is not an income or profit tax and, secondly, the pension income is not considered income from property or from a business. It should also be noted that, in this case, none of the provisions of the Convention obliges Canada to provide a credit for such tax. In this regard, we do not find provisions such as paragraphs 3(e) and (g) of Article XXVI and paragraph 6 of Article XXIX B of the Convention applicable to this case. In other words, we do not feel that the estate tax can either be deductible by or creditable to the taxpayer.

With respect to the U.S. income tax paid by the taxpayer in respect of the lump-sum pension payment received by the taxpayer, since it appears that the taxpayer is a resident of Canada not only for the purpose of the Act but also for the purpose of the Convention, the U.S. could, under the Convention, impose income tax on such payment only up to its normal withholding rate for such kind of payment to a non-resident of the U.S.

Any amount of tax imposed by the U.S. in excess of that rate should be refunded by the U.S. pursuant to Article XXIV of the Convention. Canada will provide a foreign tax credit for the U.S. income tax required to be paid in accordance with the Convention by the taxpayer on such pension payment.

If the taxpayer, not the estate, indeed paid the U.S. estate tax, there appears to be a case of double taxation because the taxpayer will not be able to claim any deduction or credit for such tax. This is because an estate tax is not an income or profit tax and, in the absence of a specific rule in the Convention, there is no mechanism to avoid double taxation in this regard.

We trust you will find the above to be of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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