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: 1) Can the taxpayer transfer an amount currently held in a 401(k) plan to an RRSP under paragraph 60(j) of the Act? 2) Can the taxpayer claim the US withholding taxes under subsection 126(1)? 3) Is the 10% additional US tax payable on the early withdrawal from a 401(k) plan considered a non-business-income tax as defined by subsection 126(7) of the Act?
Position: 1) Yes. 2) Yes 3) Yes
Reasons: 1) The payment meets the conditions of paragraph 60(j). 2) The amount withheld under Section 1441 of the Code is an income or profits tax. 3) The 10% additional US tax imposed under Section 72 of the Code is an income or profits tax.
Re: Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.
This letter is based solely on the Facts and Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.
We understand that to the best of your knowledge and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:
(i) in an earlier tax return of the above-noted taxpayer or of a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayer or of a related person;
(iii) under objection by the above-noted taxpayer or by a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") or the Income Tax Regulations (the "Regulations") and every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act, unless stated otherwise.
Our understanding of the Facts, Proposed Transactions and Purpose of the Proposed Transactions is as follows:
The following terms have the meaning specified below:
a) "Code" means the US Internal Revenue Code of 1986, as amended.
b) "CRA" means the Canada Revenue Agency.
c) "Individual" means XXXXXXXXXX.
d) "former long-term resident of the US" means any individual who is a lawful permanent resident of the US in eight or more taxable years during the preceding fifteen taxable years, not counting any year in which the individual is treated as a resident of Canada under the Treaty, or as a resident of any country other than the US under the provisions of any other US tax treaty and, in either case, the individual does not waive the benefits of such treaty applicable to residents of the other country.
e) "lump-sum payment" means the amount paid from the Plan.
f) "Plan" means a 401(k) retirement savings plan.
g) "RRSP" means a registered retirement savings plan.
h) "T1" or "T1 Return" means a T1 General Income Tax and Benefit Return.
i) "Treaty" or "Canada-US Tax Treaty" means the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital signed on September 26, 1980 as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.
j) "United States" or "US" means the United States of America.
k) "USD" means United States Dollars.
l) "US Employer" means XXXXXXXXXX.
1. The Individual is XXXXXXXXXX years of age, a XXXXXXXXXX citizen and has been a resident of Canada, for the purposes of the Treaty, since XXXXXXXXXX. His address is XXXXXXXXXX.
2. The Individual is not a US citizen nor considered to be a former long-term resident of the US.
3. The Individual files his annual T1 Returns with the XXXXXXXXXX Tax Centre and he resides within the area served by the XXXXXXXXXX Tax Services Office.
4. The Individual was an employee of the US Employer in the US until XXXXXXXXXX.
5. During the time that the Individual was employed by the US Employer, the Individual contributed to the Plan sponsored by the US Employer which qualified under Section 401(k) of the Code.
6. The amount in the Plan is attributable to services rendered by the Individual during a period throughout which the Individual was not resident in Canada.
7. As at XXXXXXXXXX, the Individual's entitlements under the Plan were approximately $XXXXXXXXXX USD. Under the Plan, the Individual can receive his entitlements in the form of a lump-sum payment to his own personal account under the Code on a taxable basis.
8. The Individual will establish an RRSP and the Individual will be the annuitant under the RRSP.
9. The Individual will notify the administrator of the Plan and make arrangements for his entitlements under the Plan, to be withdrawn in XXXXXXXXXX as a lump-sum payment.
10. The lump-sum payment will be subject to withholding taxes in the US under Section 1441(a) of the Code. An additional US tax equal to 10% of the lump-sum payment will be applied under Section 72 of the Code.
11. The Individual will make a contribution, not exceeding the lump-sum payment, to an RRSP in XXXXXXXXXX or within 60 days after the end of the year.
12. Pursuant to subparagraph 56(1)(a)(i), the Individual will include the lump-sum payment, converted into Canadian dollars at the exchange rate in effect at the time of receipt, in his income as reported on his XXXXXXXXXX T1 Return.
13. The Individual will designate the amounts contributed to the RRSP on Schedule 7 of his XXXXXXXXXX T1 Return.
Purpose of Proposed Transactions
14. The purpose of the proposed transaction is to allow the Individual to transfer his benefit entitlements under the Plan to his RRSP as he does not plan to return to reside in the US and wishes to ease his tax compliance requirements.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions and Purpose of the Proposed Transactions and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. The Individual will be entitled to a deduction under paragraph 60(j) of the Act for the contribution to his RRSP, as described in 11 above.
B. For the purposes of the definition of "non-business-income tax" in subsection 126(7) of the Act, the withholding taxes and the additional US tax equal to 10% of the lump-sum payment (as described in 10 above) will constitute income or profits taxes paid by the Individual to the government of the US.
C. For the purposes of subparagraph 126(1)(b)(i) of the Act, the amount to be included in "qualifying income" from the US, for purposes of calculating the foreign non-business tax credit, is the gross amount of the pension included in income under subparagraph 56(1)(a)(i) of the Act without deducting the amount transferred under paragraph 60(j) of the Act.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are completed prior to XXXXXXXXXX.
Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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