2 November 2012 External T.I. 2012-0438961E5 - RRIF payment to a non-resident

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: Withholding tax applicable to a RRIF payment to a non-resident.

Position: General comments provided.

Reasons: Legislation.

XXXXXXXXXX

2012-043896

November 2, 2012

Dear XXXXXXXXXX:

Re: Registered Retirement Income Fund (“RRIF”) payment to a non-resident

We are writing in response to your fax dated January 30, 2012 wherein you ask several questions pertaining to a payment from a RRIF to a non-resident of Canada. We also acknowledge our telephone conversation of April 26, 2012 (XXXXXXXXXX/Elsey).

You describe a scenario where a non-resident of Canada, living in Mexico, has received a RRIF distribution in the form of shares. You state that the distribution is in respect of the “minimum amount” required to be withdrawn from the RRIF for the year. The RRIF’s only holdings are shares of a mortgage investment corporation (“MIC”). The RRIF is managed by a trust company resident in Canada. In such circumstances, you ask whether the RRIF distribution is subject to withholding tax at a rate of 15% and if so, who is responsible for withholding the tax. In the event that the MIC shares held by the RRIF drop in value during the year, you would like to know whether the withholding tax should be based on the share value at the beginning of the year or at the end of the year. Also, you ask what share value is to be used in calculating the minimum amount for the following year. Assuming that the RRIF realizes a loss, your final question is whether the annuitant of the RRIF can use the loss to reduce other Canadian-sourced income.

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. However, we are prepared to provide you with the following general comments.

Your first question relates to the withholding tax rate applicable to RRIF distributions. Payments from a RRIF to a non-resident of Canada are subject to Part XIII tax in accordance with paragraph 212(1)(q) of the Income Tax Act (the “Act”). Where the non-resident is a resident of a country with which Canada has entered into an income tax convention, the 25% Part XIII tax may be reduced pursuant to that particular convention.

Pursuant to paragraph 2 of Article 17 of the Convention between the Government of Canada and the Government of the United Mexican States, if a payment out of a RRIF qualifies as a “periodic pension payment”, a reduced withholding tax of 15% may apply. The term “periodic pension payment” is defined in section 5 of the Income Tax Conventions Interpretation Act. In very general terms, a “periodic pension payment” does not include a payment out of a RRIF where the total of all payments under the RRIF at or before the time of the payment and in the year, exceeds the greater of:

(i) twice the amount that would be the “minimum amount” under the RRIF for the year, and

(ii) 10% of the fair market value (“FMV”) of the property held in connection with the RRIF at the beginning of the year.

It is a question of fact whether a payment out of a RRIF is a periodic pension payment which must be determined on a case-by-case basis.

Regarding your second question as to who is responsible for withholding the Part XIII tax, pursuant to subsection 215(1) of the Act, the Canadian resident paying or crediting an amount that is subject to tax under Part XIII is responsible for withholding the tax and remitting that amount to the Receiver General on behalf of the non-resident person. In the case of a RRIF, it is the RRIF carrier who is responsible for withholding and remitting the Part XIII tax.

Your third and fourth questions concern the share value to be used in calculating the withholding tax and the minimum amount. The term “minimum amount” is defined in subsection 146.3(1) of the Act. Basically, the minimum amount is nil in the first year of the fund and, thereafter, the FMV of the property held in connection with the RRIF at the beginning of the year multiplied by a prescribed factor. In the situation described, the FMV of the MIC shares at the beginning of the year is used in calculating the minimum amount under the RRIF for that year. The RRIF minimum amount can be paid in cash or in kind, subject to the terms of the fund. The withholding tax obligation is based on the RRIF payments (which would include the minimum amount) made to the non-resident annuitant. The Act does not provide for a recalculation of the minimum amount when the FMV of the property held in the RRIF at the beginning of the year decreases during the year.

Regarding your final question, there is no provision in the Act which permits a RRIF annuitant to use a loss in his or her RRIF to reduce or offset other Canadian-sourced income received by the RRIF annuitant.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch