26 January 1986 Income Tax Severed Letter 5-1025 - Withholding tax rates on various types of payments to residents of the United States

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.

This is in reply to your letter of January 26, 1986.

The appropriate rates of withholding tax on the particular types of payments to residents of the United States mentioned in your letter are as follows:

• 1. A lump sum payment from a registered pension plan (“RRP”). Assuming that the payment is not attributable to services rendered by the non-resident recipient in taxation years at no time during which he was resident in Canada and throughout which he was not employed, or was only occasionally employed, in Canada, we agree that the appropriate withholding tax rate is 25% by virtue of paragraph 212(1)(b) of the Income Tax Act (the “Act”) and paragraph 2(a) of Article XVIII of the 1980 Canada-U.S. Income Tax Convention (the “Convention”).
• 2. A lump sum payment from a deferred profit sharing plan (“DPSP”). We agree that the appropriate withholding tax rate is 25% by virtue of paragraph 212(1)(b) of the Act and paragraph 1 of Article XXII of the treaty.
• 3. A lump sum payment from a registered retirement savings plan (“RRSP”). We agree that the appropriate withholding tax rate is 25% by virtue of paragraph 212(1)(l) of the Act and paragraph 2(a) of Article XVIII of the treaty.
• 4. A periodic pension payment from an RPP. Again, assuming that the payment is not attributable to services rendered by the non-resident recipient in taxation years at no time during which he was resident in Canada and throughout which he was not employed, or was only occasionally employed, in Canada, we agree that the payment is subject to withholding tax by virtue of paragraph 212((1)(h) of the Act and paragraph 2(a) of Article XVIII of the treaty, the latter restricting the rate to 15%.
• 5. A periodic payment directly from a DPSP (as allowed by subparagraph 147(2)(k)(v). We agree that the appropriate rate of withholding tax is 25% by virtue of paragraph 212(1)(a) of the Act and paragraph 1 of Article XXII of the treaty.
• 6. A periodic payment from an annuity acquired by direct transfer of funds from a DPSP. Assuming that the trustee of a DPSP pays, pursuant to the plan, an amount to a person described in subparagraph 147(2)(h)(vi) of the Act to purchase the type of annuity described in that subparagraph, we agree with you that the amount as transferred would not be included in computing the income of the beneficiary of the DPSP under subsection 147(10) of the Act if he had been resident in Canada throughout the year, and therefore that the amount so transferred will not be subject to non-resident withholding tax under paragraph 212(1)(m) of the Act. A periodic payment from the annuity as purchased by this transfer will be subject to withholding tax under paragraph 212(1)(o) of the Act if, were the non-resident recipient a resident in Canada throughout the year, such annuity payment would be required to be included in computing his income for the year and would not be deductible in computing that income. The annuity purchased by the transfer of funds from the DPSP is a “prescribed annuity contract” (“PAC”) as defined in subsection 304(1) of the Income Tax Regulations (the “Regulations”). A periodic payment to a Canadian resident from a PAC is includable in income under paragraph 56(1)(d) of the Act because subjection 12.2(3) does not apply to a PAC. Furthermore, since the annuity is purchased pursuant to a DPSP, no part of the annuity payment is prescribed by subsection 300(1) of the Regulations to be a return of capital for purposes of a deduction by a Canadian resident under paragraph 60(a) of the Act. Therefore, we agree with you that a periodic payment from such an annuity to a non-resident of Canada is subject to withholding tax under paragraph 212(1)(o) of the Act and paragraph 2(b) of Article XVIII of the treaty, the latter restricting the rate to 15%.
• 7. A periodic payment from an annuity acquired by direct transfer of funds from an RRSP. During our telephone discussion with you on April 28, you indicated that you do not mean an acquisition of an annuity as described in subparagraph 60(1)(ii) of the Act from a refund of premiums from an RRSP under the circumstances described in subparagraph 60(1)(v). Rather, you are contemplating a direct transfer of funds from the trustee of one RRSP to the trustee of another RRSP, which latter RRSP will then pay out periodic annuity payments. Since such a direct transfer of funds from one RRSP to another RRSP would not be included in the annuitant's income under subsection 146(8) of the Act, had he been a resident in Canada throughout the year, because of the rollover provision in subsection 146(16) (assuming that all of the requirements of that subsection had been met), therefore the same kind of transfer on behalf of a non-resident annuitant will not be subject to withholding tax under paragraph 212(1)(l) of the Act. We agree with you that the periodic annuity payments to the non-resident from the second RRSP will then be subject to withholding tax under paragraph 212(1)(l) of the Act and paragraph 2(a) of Article XVIII of the treaty, the latter restricting the rate to 15%.
• 8. A periodic payment from a registered retirement income fund (“RRIF”). We agree that such a payment is subject to withholding tax by virtue of paragraph 212(1) of the Act and paragraph 2(a) of Article XVIII of the treaty, the latter restricting the rate to 15%.

We also agree with you that whether funds from a DPSP are transferred directly to a person licensed to issue annuities in order to purchase an annuity as described in subparagraph 147(2)(h)(vi) of the Act (i.e. as in 6 above), or such funds are transferred by the trustee of the DPSP on behalf of the non-resident person pursuant to an authorization in prescribed form to an RRSP (which transfer is not subject to withholding tax under paragraph 212(1)(m) of the Act), the subsequent periodic annuity payments would in either case be subject to 15% withholding tax for the reasons stated in 6 and 7 above, respectively, the only substantive difference being the difference in the terms of the respective annuities.

Finally, you have asked whether the Canadian payor's obligation to withhold taxes would be affected in cases where the non-resident recipient elects under section 217 to be taxed under Part I of the Act. In such a case, section 809 of the Regulations, as permitted by subsection 215(5) of the Act, provides a formula for determining a special reduction in the withholding tax at source. Please refer to the comments in note (4) of Information Circular 76-12R), paragraph 50(e) of Information Circular 77-16R2, and particularly paragraphs 18, 19 and 20 of Interpretation Bulletin. Any queries regarding this special reduction should be made to the applicable local District Taxation Office.

We trust that the above will be of assistance to you.