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: A Canadian individual is a residual beneficiary of a U.S. inter-vivos personal trust settled by a U.S. individual. The U.S. individual died in 2014, owning a U.S. IRA. The proceeds of the IRA will be paid to the U.S. individual's estate in 2015. The estate will pay the proceeds of the IRA to the trust in 2015. The trust will pay a portion of the proceeds of the IRA to the Canadian individual in 2015, and will withhold 15% in respect of U.S. tax payable by the Canadian individual. Will the amount paid to the Canadian individual be included in his income in 2015 for Canadian tax purposes, and will the 15% withholding be considered "non-business income tax"?
Reasons: Clause 56(1)(a)(i)(C.1), paragraph 12(1)(m), subsections 104(13) and 108(5), and the definition of "non-business income tax" in subsection 126(7).
Distribution from XXXXXXXXXX (the "Trust")
This is in reply to your email of XXXXXXXXXX in which you ask for an advance income tax ruling on a proposed distribution that you expect to receive from the above Trust. We also acknowledge the information provided in subsequent emails and telephone conversations in connection with your request.
To the best of your knowledge, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier return of yours, or of a person related to you (however, see paragraph 9 below);
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of yours or of a person related to you;
(iii) under objection by you or a person related to you;
(iv) before the courts, and no judgement has been issued which may be under appeal; or
(v) the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.
In this letter, the following terms have the meanings specified below. Unless otherwise noted, all legislative references are to the Act.
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter.
(b) "Beneficiaries" means:
(c) "CRA" means the Canada Revenue Agency.
(d) "Estate" means the XXXXXXXXXX.
(e) "IRA" means a U.S. Individual Retirement Annuity as described in subsection 408(a) and/or 408(h) of the IRC.
(f) "IRC" means the Internal Revenue Code of 1986, U.S. Code Title 26.
(g) "Settlor" means XXXXXXXXXX, the settlor of the Trust.
(h) "State A" means XXXXXXXXXX.
(i) "Treaty" means the Canada-U.S. Tax Convention, as amended by the Fifth Protocol, signed on September 21, 2007.
(j) "Trust" means the XXXXXXXXXX.
(k) "U.S." means the United States of America.
Our understanding of the Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:
1. You are resident in Canada for purposes of the Act and the Treaty. You file your tax returns with the XXXXXXXXXX Tax Centre, and are served by the XXXXXXXXXX Tax Services Office.
2. Upon the death of the Settlor, you and XXXXXXXXXX became equal Beneficiaries of the remainder interest in the Trust. All of the Beneficiaries are resident in Canada.
3. The Trust was settled under the laws of State A by a declaration of trust on XXXXXXXXXX. The Settlor was the only contributor to the Trust, and was also a trustee of the Trust. Under the terms of the declaration of trust, any or all of the capital or income of the Trust could be paid to the Settlor, and the Settlor could revoke the Trust at any time.
4. The Settlor died on XXXXXXXXXX, 2014. At the time of her death, she was resident in State A, U.S. She was resident in Canada until approximately the late XXXXXXXXXX, and after emigrating from Canada, remained a non-resident of Canada until her death.
5. The trustees of the Trust are resident in State A, U.S., and the assets of the Trust are managed in State A, U.S. The Trust is liable to tax in the U.S. under the IRC on any income that is not distributed in a particular year. The year end of the Trust is XXXXXXXXXX. The Trust is a trust for purposes of the Act and is resident in the U.S. for purposes of the Act and the Treaty.
6. The executors of the Estate are resident in State A, U.S., and the assets of the Estate are managed in State A, U.S. The Estate is liable to tax in the U.S. under the IRC on any income that is not distributed in a particular year. The year end of the Estate is XXXXXXXXXX. The Estate is a trust for purposes of the Act and is resident in the U.S. for purposes of the Act and the Treaty.
7. At the time of her death, the Settlor was the owner of the IRA. Upon her death, the Estate became the beneficiary of the IRA. The IRA is a "foreign retirement arrangement" as described in section 6803 of the Income Tax Regulations. All amounts in the IRA are pre-tax amounts; therefore, all distributions from the IRA are taxable under section 72 of the IRC.
8. The Estate was not subject to estate tax under the IRC, since the value of the Settlor's estate was less than the relevant threshold allowed under the IRC.
9. In XXXXXXXXXX 2014, you received approximately US$XXXXXXXXXX from the after-tax portion of the Trust from funds other than proceeds of the IRA.
10. In 2015, subsequent to the receipt of this advance income tax ruling, the proceeds of the IRA will be paid to the Estate.
11. In 2015, subsequent to the payment of the proceeds of the IRA to the Estate, the Estate will pay the proceeds of the IRA from the Estate to the Trust.
12. In 2015, subsequent to the payment of the proceeds of the IRA to the Trust, the Trust will pay cash legacies to XXXXXXXXXX U.S. charities of US$XXXXXXXXXX from the proceeds of the IRA.
13. The trustees of the Trust will retain approximately US$XXXXXXXXXX of the proceeds of the IRA in the Trust to pay possible State A state tax. The trustees will not know if the State A state tax is exigible until XXXXXXXXXX, so this amount will be retained in the Trust until then. If the Trust is not required to pay state tax, the retained amount will be distributed to the Beneficiaries.
14. In 2015, subsequent to the payment of the cash legacies to the U.S. charities, the Trust will pay the remaining proceeds of the IRA (after the holdback of approximately US$XXXXXXXXXX for possible state tax described above) to the Beneficiaries. The total amount paid to all the Beneficiaries will be approximately US$XXXXXXXXXX.
15. The proceeds of the IRA that are paid by the Trust to the Beneficiaries (approximately US$XXXXXXXXXX) in 2015 will not be taxable to the Settlor, the Estate or the Trust under the IRC.
16. The proceeds of the IRA that are not paid to the Beneficiaries in 2015 by the Trust will be taxed as ordinary income in the Trust under the IRC in 2015.
17. Under section 1441 of the IRC, the payment of the remaining proceeds of the IRA to the Beneficiaries by the Trust in 2015 (approximately US$XXXXXXXXXX) will be subject to a U.S. withholding tax of 30%, reduced to 15% under the Treaty. Under the IRC, the withholding tax of 15% is a tax payable by the Beneficiaries.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to pay the proceeds of the IRA to the Beneficiaries in accordance with the terms of the IRA, the last will and testament of the Settlor and the declaration of trust of the Trust.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. Your share of the proceeds of the IRA paid to you by the Trust in 2015 as described in paragraph 14 above, inclusive of your share of the 15% withholding as described in paragraph 17 above, will be considered to be income from a trust that is sourced in the U.S., and will be included in your income for Canadian tax purposes in 2015 under paragraphs 104(13)(a) and 12(1)(m) of the Act.
B. The 15% withholding tax withheld by the Trust from your share of the payments described in Ruling A will be a "non-business-income tax" as described in subsection 126(7) of the Act, paid to the U.S. government by you in 2015 to the extent that it is not deducted by you under subsection 20(12) of the Act.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014 and are binding on the CRA provided that the payments described in Ruling A above are paid to you by XXXXXXXXXX.
The above-noted rulings are based on the Act and the Treaty in their present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the rulings provided herein.
The rulings provided herein are based solely on the Facts, Proposed Transactions and Purpose of the Proposed Transactions described above. Any documents submitted with your request do not form part of the Facts and Proposed Transactions and any other references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above. Specifically, nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on:
- the application of the rules in sections 94, 94.1 or 94.2 of the Act;
- any reporting requirements under sections 233.2 to 233.6 of the Act;
- any amounts paid or payable by the Trust other than the amounts described in Ruling A; or
- the application of any of the rules under the IRC or State A tax legislation.
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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