19 March 2004 External T.I. 2003-0037301E5 - IRA transfer to RRSP; foreign tax credits

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: Is there any relief available where the foreign tax credit that is available on a substantial lump sum transfer from a foreign retirement arrangement to an RRSP cannot be fully used?

Position: The amount of relief available depends on a number of factors and in particular whether the recipient is an American citizen (including persons with dual citizenship)..

Reasons: The Canada-U.S. treaty provisions have application to override those available to non-U.S. citizens.

XXXXXXXXXX 2003-003730
W. C. Harding
March 19, 2004

Dear XXXXXXXXXX:

Re: Foreign Tax Credits on Transfer from an IRA to an RRSP

This is in response to your letter of September 2, 2003 concerning the application of foreign tax credits available on the receipt of an amount out of an individual retirement account (an "IRA") that is a foreign retirement arrangement (an "FRA") as defined in the Income Tax Act (the "Act"), where the amount is transferred to a registered retirement savings plan (an "RRSP").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address:

http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.htm l.

In your letter, you indicated that the situation you are considering involves a Canadian citizen and the following commentary is valid for Canadian citizens.

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 will 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 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" (as that term is used in the treaty), the tax so charged shall not exceed 15 percent of the gross amount of the payment. Consequently, where a Canadian resident beneficiary receives periodic pension payments under an IRA, the periodic pension payments will 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. We are unable to comment on the amount of U.S. withholdings that would apply to the lump-sum payments from a particular IRA.

While there are certain exceptions, the taxes withheld by the administrator of an IRA are generally 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, where the proportion is the taxpayer's foreign income divided by the taxpayer's total adjusted income. Interpretation Bulletin IT-270R2 provides CRA's general views on the computation of the foreign tax credit.

Subsection 4(2) of the Act provides that income from a source will not be reduced by deductions permitted by sections 60 to 63 for purposes of paragraph 4(1)(a) of the Act. Accordingly, for purposes of subparagraph 126(1)(b)(i) of the Act, the amount to be included in "income from sources", for purposes of calculating the foreign non-business tax credit, is the gross amount included in income under clause 56(1)(a)(i)(C.1) of the Act, without deducting the amount transferred to an RRSP under paragraph 60(j) of the Act.

As you have indicated in your letter, an application of the entire foreign tax credit in the year the amount is received, may not be available if the amount is transferred from the IRA to an RRSP. Furthermore, a carryover of any unused foreign non-business tax credits is not available under the Act. Accordingly, the CRA could not provide the type of relief you are seeking. The role of CRA is to administer the Act, which may involve the interpretation of the Act, but does not involve the formulation of tax policy. In the alternative, these matters should be referred to the Department of Finance, which is responsible for formulating and dealing with concerns regarding tax policy in Canada.

We would like to note that in previous technical opinions issued by CRA, we indicated that individuals might be able to apply the provisions of subsections 20(12) of the Act and reduce income by the amount of foreign taxes paid on receipts out of an IRA. These provisions are discussed in IT-506 Foreign Income Taxes as a Deduction from Income. The Bulletin and our comments were based on the wording of the provision prior to its amendment in 1994 (applicable after 1991) and no longer reflect our position on this matter. In basic terms, subsections 20(11) and 20(12) allow a deduction of certain foreign taxes, including certain foreign taxes paid in respect of income received from property, if the foreign taxes have not been used in computing a foreign tax credit. However, amounts received out of an IRA are treated as pension income under paragraph 56(1)(a) of the Act and under the Treaty and not as income from a business or property. Accordingly, neither subsection 20(11) or 20(12) of the Act can apply to allow a deduction.

The above discussion relates to the receipt of amounts by a resident of Canada that is not a citizen of the United States. We would also like to note that similar results will occur for residents that are citizens of the United States. However, the applicable provisions are those found in paragraphs 4 and 5 of Article XXIV of the Treaty.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch