16 April 2004 External T.I. 2003-0046111E5 - Taxation of IRA upon Death

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: Tax treatment of IRA upon death of a resident of Canada who recently immigrated to Canada.

Position: Subsections 70(2) and 70(3) would apply.

Reasons: Interpretation of the law.

XXXXXXXXXX 2003-004611
S. Leung
April 16, 2004

Dear XXXXXXXXXX:

Re: Taxation of U.S. Individual Retirement Account ("IRA") Upon Death

We are writing in reply to your letter of October 28, 2003 in which you requested our opinion on the tax consequence upon death of a U.S. citizen who had immigrated to Canada two years ago and who held an IRA immediately before his death. You have reviewed our document #9800545, dated August 10, 1998, and found that the position expressed in that document "would seem to be inconsistent with tax policy, which takes deliberate measures to ensure that pre-residence gains are not subject [to] Canadian taxation". You further indicated that the "step-up adjusted cost basis provisions of s.128.1(1)(c) of the Income Tax Act and the exemption for departure gains for short-term residents under s.128.1(4)(b)(iv) of the Income Tax Act are good examples of this". Furthermore, you stated that as the value of the IRA would not be included in computing the deceased person's U.S. 1040 income tax return in the year of death and "may not attract U.S. estate tax if the value of the decedent's estate is sufficiently low, exposing the IRA to Canadian taxation only serves to make the result more onerous".

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.

As stated in our document #9800545, an IRA may be treated as a foreign retirement arrangement, a pension plan, an employee benefit plan, a retirement compensation arrangement, a salary deferral arrangement or some other form of arrangement depending on the terms of the IRA and its use in a given situation. A foreign retirement arrangement ("FRA") is defined in subsection 248(1) of the Income Tax Act (the "Act") as a plan or arrangement prescribed by section 6803 of the Income Tax Regulations. That section prescribes IRAs to which subsection 408(a), (b) or (h) of the U.S. Internal Revenue Code of 1986 applies. Since we do not have sufficient information regarding the IRA referred to in your letter, for the purposes of this reply, we have limited our discussion to IRAs that are FRAs.

As discussed in our document #9800545, where the owner of the IRA dies before the plan's maturity and the property in the plan was not previously used to acquire an irrevocable annuity, it is our view that the interest in the IRA constitutes a "right or thing" within the meaning of subsection 70(2) of the Act. Any amount of such right or thing that, when realized or disposed of, would have been included in computing the owner's income for tax purposes, would be required to be included in computing the owner's income in the year in which he or she died. In this regard, an amount would not be required to be included in computing the income of the decedent under subsection 70(2) of the Act if such amount, had it been realized or disposed of before the owner's death, represented a payment out of or under a FRA and would not have been required to be included in computing the income of the owner under clause 56(1)(a)(i)(C.1) because of the exception contained therein.

Subject to the comments above, our comments in document #9800545 still applies as they are based on the assumption that the full amount of the IRA would have been taxable in Canada had it been realized or disposed of before death. Since the amount that is required to be included in computing the decedent's income is due to the operation of subsection 70(2) of the Act and not because of a distribution or payment from or out of an IRA, paragraph 1 of Article XVIII of the Canada-United States Income Tax Convention would not apply.

As to whether the above-mentioned tax consequences to a recent immigrant who held an interest in an IRA before his death is inconsistent with tax policy, we suggest that you contact the Department of Finance because the formulation of tax policy is the responsibility of that Department. We note, however, that it may be the deliberate intention of Parliament to not have the deemed disposition and acquisition rules under section 128.1 of the Act apply to a FRA by treating the FRA as an "excluded right or interest" (defined in subsection 128.1(10) of the Act) such that payments out of the FRA may be taxed in Canada after the taxpayer immigrated into Canada. Pursuant to subparagraph 128.1(1)(b)(iv) or 128.1(4)(b)(iii) of the Act, an excluded right or interest is not deemed to be disposed of upon becoming or ceasing to be a resident of Canada.

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

Yours truly,

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

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