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: Whether distributions of income from a REIT resident in Canada to a US IRA for the benefit of a US resident individual are subject to withholdings in Canada?
Reasons: Distributions from the Canadian-resident REIT are subject to paragraph 212(1)(c) of the Act and article XXII(2) of the Canada-US Treaty.
July 11, 2014
Re: Trust Distributions to US Individual Retirement Arrangement
We are writing in response to your letter dated July 15, 2013, in which you requested our views regarding the Canadian taxation of distributions from a Canadian resident trust to a US Individual Retirement Account ("IRA"). This response also reflects our subsequent conversations, correspondence and emails.
In particular, you described a situation involving an IRA account of Mr. X, an individual who is a citizen and a resident of the US for the purpose of the Canada-United States Tax Convention (the "Treaty"). The account of Mr. X is an Individual Retirement Account as defined in section 408 of the US Internal Revenue Code ("IRC"), and not a Roth IRA as defined in IRC section 408A. Further, the IRA is considered a qualifying person for purposes of the Treaty by virtue of paragraph (4) of article XXIX-A of the Treaty.
The IRA holds units of a real estate investment trust ("REIT"), as defined at subsection 122.1(1) of the Income Tax Act (the "Act"). The REIT is a "unit trust" and a "mutual fund trust", as those terms are defined at subsection 248(1) of the Act, and a trust that is a resident of Canada for the purposes of the Treaty. It is understood that dividend and interest income derived in Canada by the IRA is exempt from Canadian taxation pursuant to paragraph 2 of article XXI of the Treaty.
In a situation where the REIT pays a distribution of income to its unit holders, you have asked whether withholdings of tax are required under Part XIII of the Act in respect of the portion of the distribution that is paid to the IRA.
In general, pursuant to paragraph 212(1)(c) of the Act, distributions of income from a Canadian resident trust, such as the REIT described above, to a non-resident of Canada are subject to 25% withholding tax. However, distributions of income from a Canadian resident trust to a US resident that is a qualifying person under the Treaty would generally fall under article XXII of the Treaty in respect "Other Income", such that the Part XIII tax charged by Canada shall be limited to 15%.
We do note that an exception to the application of article XXII is available for distributions from a trust that is a "specified investment flow-through trust" ("SIFT Trust") as defined in subsection 122.1(1) of the Act. Where applicable, a distribution of income from a SIFT Trust is deemed to be a dividend pursuant to subsection 104(16) of the Act, and is similarly treated as a dividend for the purposes of the Treaty pursuant to the 2007 Protocol Annex B in regards to paragraph 3 of article X.
However, owing to the fact that a REIT is, by definition, precluded from being considered a SIFT Trust under the Act, such that the distributions of income from the REIT are not treated as dividends for Canadian tax purposes pursuant to subsection 104(16), the treatment of distributions from income trusts and royalty trusts provided under paragraph 3 of article X would not be applicable in the context of distributions of income from a REIT.
As such, in the situation that you have described, tax withholdings of 15% would be required on the distributions from the Canadian-resident REIT to the US IRA account of Mr. X pursuant to paragraph 212(1)(c) of the Act and subject to paragraph 2 of article XXII of the Treaty.
We trust these comments are of assistance.
Robert Demeter, CGA, CPA
For Division Director
International Section I
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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