29 May 2018 STEP Roundtable Q. 8, 2018-0742141C6 - Application of subsection 70(5)

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: Can CRA comment on how it views the case of McKenzie v The Queen (2017 TCC 56)?

Position: Comments provided as to the relevant legislative provisions.

Reasons: See below.

2018 STEP CRA Roundtable – May 29, 2018

QUESTION 8. Subsection 70(5)

In a recent case, McKenzie v The Queen (2017 TCC 56), the Court stated that subsection 70(5) of the Income Tax Act (the “Act”) does not apply to a non-resident person. Could the CRA comment on how it views this case?

CRA Response

The decision in McKenzie v The Queen dealt with a payment received by the appellant from a U.S. individual retirement account (the “IRA”) following the death of her mother. The appellant objected to the reassessment that had included the amount received in her income, pursuant to clause 56(1)(a)(i)(C.1) of the Act. The relevant facts in the case can be briefly summarized as follows:

a. The appellant, who was a resident of Canada as well as a U.S. citizen, was the named beneficiary of her mother’s IRA.

b. When her mother died, the appellant received a distribution from the IRA which was included in the appellant’s income for U.S. tax purposes and taxed accordingly.

c. The appellant did not include the amount received in her income in her Canadian tax return.

d. Her return for that year was subsequently reassessed by CRA to include the amount in income and to allow a foreign tax credit in respect of the U.S. income taxes paid on the amount.

The appeal raised two issues for the Tax Court (the “Court”) to address:

1. whether there is an alternate taxing mechanism, other than clause 56(1)(a)(i)(C.1) for an IRA, and

2. whether subsection 248(28) applied to the amount received.

In rendering its decision, the Tax Court rejected the appellant’s argument that there is an alternative method whereby the IRA should be treated as an investment portfolio – and in doing so, clarified that clause 56(1)(a)(i)(C.1) correctly applied to include the amount received in income. The Court also dismissed the appellant’s argument that there was double tax in respect of the IRA to which subsection 248(28) could apply. Accordingly, the decision confirmed CRA’s reassessment of the appellant to include the IRA amount in her income.

However, we note that in its analysis of the first issue, the Court considered whether, as the appellant had asserted, subsection 70(5) had applied to deem there to have been a disposition of the assets of the IRA at fair market value on the death of her mother. In paragraph 45 of its written decision, the Court stated, in part,

“The appellant's mother, Ms. Wicks, was not a resident of Canada. She was a resident and citizen of the United States. The appellant's mother would not have been subject to a deemed disposition pursuant to subsection 70(5) as this provision does not apply to non-resident person”.

In CRA's opinion, the statement in the last sentence quoted above is incorrect.

The Court provides a brief analysis in paragraphs 46 and 47 of the decision. We agree with the statement in paragraph 46 regarding liability for tax under Division A of the Act. It is in the last sentence of paragraph 47 that, respectfully in our view, the analysis is incorrect.

Clarification with regard to the CRA’s views with regard to the application of subsection 70(5) to a non-resident taxpayer was provided in published external technical interpretation 2002-0133410. That document was a follow-up to document 2000-0044165, which considered a scenario wherein a Canadian resident individual inherited publicly traded shares from a non-resident relative.

The response to question 2 in our document 2002—0133410 stated “Under paragraph 70(5)(a), a deceased taxpayer is deemed to have disposed of any capital property owned by the taxpayer immediately before her or his death at fair market value”. This sentence reflects CRA’s views as to the application of subsection 70(5) to both resident and non-resident taxpayers.

Phillip Kohnen
2018-074214