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 21, 1987, in which you were seeking confirmation of your understanding of the income tax treatment of payments arising out of an income averaging annuity contract (an "IAAC") for an individual considered to be a U.S. resident for the purposes of the 1980 Canada-U.S. Income Tax Convention (the "Convention") but as Canadian resident for purposes of the Income Tax Act (the "Act").
Our Comments
The following comments assume that the taxpayer was resident in Canada throughout a taxation year.
The residency rules set out in Article IV of the Convention do not override the residency provisions of the Act.
Rather, since the opening words of Article IV read "For the purposes of this Convention", these residency rules are relevant only for the purposes of determining the extent to which another Article of the Convention might exempt certain income from Canadian tax.
Assuming that the taxpayer is a Canadian resident, the effect of the above is that the taxpayer is taxable under subsection 2(1) of the Act on his world income. Since the Convention does not exempt payments out of an IAAC, they would be included in income under paragraph 56(1)(d) and taxed under Part I of the Act. The payments in this case would not be subject to withholding tax under Part XIII, paragraph 212(1)(n) of the Act.
However, may we point out that residency under the Act is a question of fact. Thus, where the residency status of the payee is uncertain, it may be appropriate for the payor to take a protective position and ensure that they are not caught by the provisions of subsection 215(6) of the Act by applying paragraph 212(1)(n) to the payments. Even if such a withholding is not applicable, the excess amounts may be recoverable by way of a refund or credit to taxes otherwise payable under Part I of the Act.
We trust that the above comments will be of assistance to you.
Income-Averaging Annuity Contracts
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