27 February 1987 Income Tax Severed Letter 5-2777 - [Article XVIII (Pensions and Annuities) of the Canada-U.S. Income Tax Convention.]

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.

K.B. Harding (613) 957-2129

February 27, 1967

Dear Sirs:

This is in reply to your letter of January 26, 1987 concerning Article XVIII (Pensions and Annuities) of the Canada-U.S. income Tax Convention.

It is our understanding that you are concerned with the following hypothetical situation:

1. Mr. A, a citizen and resident of Canada worked for Company X, a Canadian company.

2. Because of his long service, Company X has agreed to supplement Mgr. A's normal retirement pension benefits. Accordingly, Company X has by separate agreement obligated itself to pay a supplementary monthly amount to Mr. A for his lifetime once he reaches normal retirement age. When Mr. A dies, 50% of the net amount will be paid to his wife for her life. The terms of payment are identical to the terms of payment received by Mr. A and his wife out of the company's registered pension plan.

3. Shortly after reaching normal retirement age and ceasing to carry on normal full time employment, Mr. A moves to the United States and becomes a resident of that country for both Canadian and U.S. tax purposes.

4. You have advised us that the supplementary pension payment made by Company X does not represent deferred bonuses or deferred compensation.

5. To fully fund its obligation to Mr. A, Company X makes a lump sum payment to ABC Trust company in Canada. ABC Trust Company, which qualifies as a custodian under an Employee Benefit Plan, purchases a joint survivorship annuity on the life of Mr. A. ABC Trust company is both the owner and beneficiary of the policy. ABC Trust company will collect the monthly annuity from the Insurance company and pay it to Mr. A.

It is our view that the nature of the payments referred to above can only be determined after reviewing all of the relevant documents. Accordingly, we cannot comment specifically on the payments set out above, however, we are prepared to offer the following comments.

Generally speaking voluntary pension supplements made by an employer to a retired employee or his spouse are considered as payments made out of an unregistered "superannuation or pension fund or plan" and are thus included in income pursuant to paragraph 56(1)(a)(i) of the Income Tax Act (the "Act"). However, such payments may also fall within the definition of a "retiring allowance", as defined in subsection 248(1) of the Act, since such amounts will be paid for the purposes set out therein. Accordingly, it would appear that the amounts paid to Mr. and Mrs. A under the agreement would probably qualify as either a pension benefit or retiring allowance.

We are of the view that the definition of "pensions" in paragraph 3 of Article XVIII of the Canada-U.S. Income Tax Convention includes all amounts received upon or after retirement in recognition of service in an office or employment. Accordingly, this would include "retiring allowances" and "death benefits".

It is our view that the comments set out above would be valid whether or not the payments are funded by Company X. The only difference is the timing of the deduction of the expense in. the hands of the corporation.

We regret we could not reply to your question directly but hope the above comments will be of benefit to you.

Yours truly,

ORIGINAL SIGNED BY Wm. R. McColm

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch