10 April 2002 External T.I. 2002-0125375 - IRA TO RRSP

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: Can amounts paid out of a US IRA be transferred to an RRSP?

Position: No.

Reasons: The annuitant is 70 years of age and contributions to the RRSP must be made before the year in which the annuitant becomes 70 years of age.

XXXXXXXXXX 				2002-012537
					Karen Power, CA
(613) 957-8953
April 10, 2002

Dear XXXXXXXXXX:

Re: Transfer of IRA to an RRSP

We are writing in reply to your letter of February 20, 2002 requesting our comments regarding the transfer of funds held in a Canadian individual's U.S. individual retirement accounts ("IRA") to a registered retirement savings plan ("RRSP").

Our Comments

The particular circumstances in your letter on which you have asked for our views is a factual situation. As explained in Information Circular 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. We note further that your request appears to be in the nature of a tax consultation. We cannot respond to your request as such, as the CCRA does not provide tax-planning advice. We are willing, however, to provide you with some general comments on the subject. Considering the complexity of the issues involved with respect to this subject matter, we suggest that you may wish to consult with a tax professional that specializes in the area of Canadian/U.S. personal taxes. However, if you require additional information regarding your specific tax situation, we invite you to contact your local tax services office.

The Income Tax Act (the "Act") and the Internal Revenue Code of 1986 of the United States do not provide for the tax-free rollover of lump-sum amounts from a retirement plan in one country to a retirement plan in the other country.

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 Act. A taxpayer 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. The amount of the lump-sum payment to be included in the recipient's income is the gross amount converted into Canadian dollars, before U.S. withholding and penalty taxes, paid out of the IRA.

Pursuant to subparagraph 60(j)(ii) of the Act, a taxpayer may transfer certain amounts that are included in the taxpayer's income for the year to a RRSP. One such amount is the amount determined under section 60.01 of the Act, which provides that an amount received by a taxpayer from an FRA is an eligible amount if all of the following conditions are met:

? the amount has been included in the taxpayer's income pursuant to clause 56(1)(a)(i)(C.1) of the Act;

? the amount cannot be part of a series of periodic payments. In other words, it has to be a lump-sum payment; and

? the amount must have been derived from contributions made to the FRA by either the taxpayer or the taxpayer's spouse or former spouse.

It should be noted that the transfer of the IRA under subparagraph 60(j)(ii) of the Act has to be made to the individual's RRSP and not to a spousal RRSP established for the benefit of the individual's spouse. Consequently, amounts held in your FRA cannot be transferred to an RRSP established for your spouse.

Subsections 146(2) and (3) set out the conditions for registration of a retirement savings plan. One condition is that no contributions may be made to an RRSP after its maturity. Paragraph 146(2)(b.4) provides that maturity must occur before the year in which the annuitant becomes 70 years of age. Therefore, a taxpayer may contribute to his or her own RRSP up to the end of the year that the taxpayer turns 69 years of age. Since you attained the age of 69 in 2001, you are no longer able to contribute amounts to your RRSP.

We are unable to comment on the application of U.S. tax law in respect of this matter and cannot advise whether any taxes will be payable to the U.S. on the withdrawal of funds from the IRAs. This would require an interpretation of the laws of the United States, and it is outside this Directorate's mandate to provide opinions regarding foreign domestic law.

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. Since an IRA would be considered a "pension" for the purposes of Article XVIII of the Treaty, an amount paid out of an IRA 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.

Paragraph 2 of Article XVIII of the Treaty deals with the appropriate withholding taxes that should be withheld on payments out of an IRA to a resident of Canada. Under paragraph 2, pensions 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 an IRA, the periodic payments would be subjected to a maximum withholding tax of 15%. A lump-sum pension payment to a Canadian resident beneficiary would be subjected to the normal U.S. withholding taxes on payments to non-residents. As discussed above, we are unable to comment on the amount of U.S. withholdings that would apply to the lump-sum payments from your IRA.

The taxes, other than penalty taxes, withheld by the administrator of an IRA is considered to be non-business taxes paid to the United States. Consequently, a taxpayer may be entitled to claim a foreign tax credit with respect to the U.S. withholding taxes deducted from any lump-sum or periodic withdrawal from an IRA. The foreign tax credit is generally computed as the lesser of the foreign taxes paid and a proportion of the Canadian taxes paid. The proportion is the taxpayer's foreign income divided by the taxpayer's total adjusted income. The enclosed Interpretation Bulletin IT-270R2 will provide you with CCRA's general views on the computation of the foreign tax credit.

In the event that a taxpayer is not able to claim a foreign tax credit for the full amount of U.S. withholding taxes, the taxpayer may be allowed to claim a deduction under subsection 20(12) of the Act for an amount equal to the amount by which the U.S. withholding taxes exceed the foreign tax credit claimed. We are also enclosing a copy of IT-506 which provides CCRA's general views with respect to the deductibility of foreign income taxes.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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