17 April 2001 Internal T.I. 2001-0077357 - US PENSION 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 Department.

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

DOCUMENT TYPE: Tax Services Office Memo – 2001-007735

Principal Issues: Are amounts received from a deceased sister’s U.S. pension plans taxable in the hands of the Canadian beneficiary

Position: Yes.

Reasons: Amounts received out of a pension plan are taxable in the hands of the recipient.

									April 17, 2001

	WINNIPEG TAX CENTRE				HEADQUARTERS
      Darlene Wall 							M.P. Sarazin, C.A.
      T1 Client Services						(613) 824-5441

									2001-007735

Canadian Beneficiary of Deceased Sister’s U.S. Pension Plans

We are writing to you in response to your memorandum of March 28, 2001, requesting our views as to whether amounts received by a Canadian resident from his deceased sister’s U.S. pension plans would be included in the recipient’s income under the Income Tax Act (the “Act”).

The Canadian taxpayer was the named beneficiary in his deceased sister’s four U.S. pension plans. The deceased sister lived and worked in the United States. The Canadian beneficiary received amounts directly from the four U.S. pension plans and the amounts were reported on a form U.S. 1042S. Three of the four U.S. pension plans withheld taxes at the rate of 15% and the fourth U.S. pension plan withheld taxes at the rate of 30%.

Comments

Interpretation Bulletin IT-499R titled “Superannuation or pension benefits” discusses superannuation and pension benefits that are included in income under subparagraph 56(1)(a)(i) of the Act. The expression “superannuation or pension benefit” is defined in subsection 248(1) of the Act to include any amount received out of or under a superannuation or pension fund or plan. Foreign pension plans are discussed in 9 of IT-499R. Since the deceased member of the U.S. pension plans was not a resident of Canada, it is likely that the U.S. pension plans would not constitute employee benefit plans or retirement compensation arrangements for purposes of the Act. If this is the case, the payments would be included in the recipient’s income under subparagraph 56(1)(a)(i) of the Act.

Under paragraph 1 of Article XVIII of the Canada-U.S. Income Tax Convention (1980) (the “Treaty”), pensions and annuities arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State, if the recipient were a resident thereof, shall be exempt from taxation in that other State. Therefore, an amount paid out of a U.S. pension plan to a resident of Canada would be taxed in Canada unless the amount would have been exempt from tax in the U.S. if it had been received by a resident of the U.S. Since the amount was not exempt from taxes in the U.S., the Treaty would not prevent Canada from taxing the amount received by a Canadian resident.

Paragraph 2 of Article XVIII of the Treaty deals with the appropriate withholding taxes that should have been withheld on the pension payments to a resident of Canada. Under paragraph 2, pension may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 percent of the gross amount of the payment. Consequently, where the Canadian resident beneficiary receives periodic pension payments under a U.S. pension plan, the periodic payments would be subjected to a maximum withholding tax of 15%. In any other case, the pension payments to a Canadian resident beneficiary would be subjected to the normal U.S. withholding taxes on payments to non-residents. The determination of the appropriate withholding taxes that would apply to the payments from each of the U.S. pension plans is a question of fact.

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 (819) 994-2898. A copy will be sent to you for delivery to the client.

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate