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: Does the interaction of section 126 and Article XVIII(2) and Article XXIX(2) of the Canada / US Tax Treaty limit the taxpayer's foreign tax credit claim in respect of his periodic pension payments arising in the US in the particular circumstances?
Reasons: Words of the legislation permit a claim for the full amount of US taxes paid as a foreign tax credit in Canada in the circumstances, pursuant to section 126.
October 21, 2013 (613) 946-3553
We are writing in response to your letter of February 4, 2013, wherein you requested our comments concerning the extent of the availability of a foreign tax credit pursuant to section 126 of the Income Tax Act (the Act) to a Canadian resident individual taxpayer (and former citizen of the US) receiving US-sourced pension income.
Specifically, you have asked for our views regarding the Canadian income tax treatment of the US withholding tax under the US Expatriation Regime and, in particular, whether a taxpayer would be eligible to claim a foreign tax credit in Canada for the full amount of such US tax withheld.
This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
As provided under the US expatriation rules set out in section 877A of the Internal Revenue Code, we are of the understanding that where a taxpayer renounces his US citizenship, either: (i) he is subject to tax in the US on the present value of his pension as if it were received on the day prior to his expatriation (default rule), or (ii) he may elect to irrevocably waive any right to claim any reduction in withholding on future pension payments under any US treaty and pay a flat 30% US tax on the taxable portion of all future pension payments.
For purposes of our response, we have assumed that the taxpayer has elected to irrevocably waive any right to claim a reduction in withholding on future pension payments under any US treaty, and to pay a flat 30% US tax on the taxable portion of all future pension payments. We have also assumed that the pension received by the taxpayer is included in his income for Canadian income tax pursuant to paragraph 56(1)(a) of the Act, and that it is a "pension" as defined in Article XVIII(3) of the Canada-US Treaty.
In the context described, we are of the view that the interaction between section 126 of the Act and the provisions of the Canada-US Treaty will not limit the amount claimed by the taxpayer for non-business-income tax paid to the US in respect of the US-sourced periodic pension payments to 15% during the 10-year period described in Article XXIX(2)(b) of the Canada-US Treaty. As such, following the taxpayer's US expatriation and during this subsequent 10-year period, the full amount of US withholding tax on the future taxable distributions from the US pension will be considered non-business-income tax paid by the taxpayer to a government other than Canada for purposes of a foreign tax credit claim pursuant to subsection 126(1) of the Act.
We trust these comments will be of assistance.
Robert Demeter, CPA, CGA
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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