11 December 2002 External T.I. 2002-0152515 - Roth Ira - Article XVIII (US Treaty)

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.

Principal Issues: Can an election be made under paragraph 7 of Article XVIIII of the Canada-United States Income Tax Convention (the "Convention") with respect to income of a Roth IRA otherwise taxable in the hands of a Canadian resident beneficiary?

Position: Yes.

Reasons: Interpretation of the law (XXXXXXXXXX ).

XXXXXXXXXX 						2002-015251
S. Leung
December 11, 2002

Dear XXXXXXXXXX:

Re: Taxation of Roth IRA Income and Withdrawals under Article XVIII of the Canada-United States Income Tax Convention (the "Convention")

This is in reply to your letter of July 16, 2002 in which you requested our opinion as to whether paragraph 1 of Article XVIII of the Convention would apply to exempt Roth IRA withdrawals of a U.S. citizen resident in Canada (the beneficiary) from Canadian taxation and whether paragraph 7 of that Article would apply to allow the beneficiary to make an election to defer taxation in Canada with respect to capital gains realized in the plan but not distributed by the plan. The reason you have limited your enquiry regarding the application of paragraph 7 of Article XVIII of the Convention to capital gains is that you are of the understanding that interest and dividends earned by the Roth IRA are not taxable in the hands of the beneficiary pursuant to paragraph 2 of Article XXI of the Convention. You referred to Document No. 9810656 issued by our Directorate on February 3, 1999 as support for your position regarding paragraph 2 of Article XXI.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving an identifiable taxpayer. 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.

At the outset, our document No. E9810656, dated February 3, 1999 dealt with the issue whether subparagraph 2(a) of Article XXI of the Convention applies to dividends and interest received by a Roth IRA from Canadian sources such that those dividends and interest would be exempt from Canadian Part XIII withholding tax. Subparagraph 2(a) of Article XXI does not deal with the taxation of Canadian resident beneficiaries of a Roth IRA.

Taxation of Income Earned by a Roth IRA - No Article XVIII(7) Election

For Canadian tax purposes, where a Roth IRA is a non-resident non-discretionary trust, paragraph 94(1)(d) of the Income Tax Act (the "Act") would apply if the beneficiary has been resident in Canada for a period of, or periods the total of which is, more than 60 months. If that paragraph applies, the trust would be deemed to be a controlled foreign affiliate of the beneficiary and the beneficiary is required to include in computing his or her income the foreign accrual property income ("FAPI") of the trust if such FAPI exceeds $5,000 a year. "Controlled foreign affiliate" and "foreign accrual property income" have the meanings assigned under subsection 95(1) of the Act.

Where the Roth IRA is not a trust but simply a custodial account, then, generally, all income would be taxable in the beneficiary's hands as such income is deposited or credited to the account. In this regard, paragraph 81(1)(r) of the Act would not exempt the beneficiary from including the income earned in the Roth IRA in his or her income because a Roth IRA is not a "foreign retirement arrangement" as prescribed by section 6803 of the Income Tax Regulations. Foreign retirement arrangements only include plans or arrangements to which subsection 408(a), (b) or (h) of the Internal Revenue Code of 1986 (the "IRC") applies but a Roth IRA is governed by section 408A of the IRC.

Whether the Roth IRA is a trust or other arrangement, paragraph 1 of Article XVIII of the Convention would not apply to deny Canada the right to tax the beneficiary on income earned by the Roth IRA but not distributed. That is, paragraph 1 of Article XVIII applies to distributions from the plan and not to the income of the plan. In this regard, even though the income of the plan would be exempt from tax in the United States, for purposes of paragraph 1 of Article XVIII, a "pension or annuity" would not have been considered "paid" to the beneficiary until there is a distribution from the plan.

Taxation of Distributions from a Roth IRA - No Article XVIII(7) Election

Whether or not income has already been taxed in the beneficiary's hand in the year that the income was earned by the Roth IRA as described above, any subsequent distribution from a Roth IRA would not be subject to taxation in Canada. For example, in the limited circumstances where a distribution from a Roth IRA was required to be included in income pursuant to a particular provision in the Act (note that where the Roth IRA is a trust, most distributions would likely be on account of capital and would not be taxable under the Act) paragraph 1 of Article XVIII of the Convention would apply to deny Canada the right to tax that distribution.

Election under Paragraph 7 of Article XVIII of the Convention

A Canadian resident beneficiary of a Roth IRA may elect under paragraph 7 of Article XVIII of the Convention to defer taxation in Canada, under rules established by the Competent Authority of Canada, with respect to any income earned by the Roth IRA but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan. The International Tax Directorate of the Canada Customs and Revenue Agency (CCRA) is in the process of establishing rules with respect to such election. For further detail, please contact Competent Authority Division, International Tax Directorate, 5th Floor, Canada Building, 344 Slater Street, Ottawa, Ontario, KIA 0L5.

However, for greater certainty, where an election was made under paragraph 7 of Article XVIII of the Convention to defer Canadian taxation, it is our view that the deferred income will be taxed when there is a distribution from the plan under the rules established by the Competent Authority of Canada and paragraph 1 of Article XVIII of the Convention would not apply to exempt such income from taxation in Canada.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the CCRA.

Yours truly,

Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch