31 July 1987 Income Tax Severed Letter 5-3343 - [XXXX]

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.

J. Thompson (613) 957-2127

XXXX

July 31, 1987

Dear Sirs:

INDEXED

Re: U.S. Railroad Retirement Board Benefits

This is in reply to your letter of April 24, 1987 directed to Provincial and International Relations Division concerning the taxation of United States pension benefits received from the U.S. Railroad Retirement Board.

In broad terms, railroad retirement benefits paid under the Railroad Retirement Act of 1974 are divided into Tier 1 and Tier 11 benefits. Tier 1 benefits are equivalent to U.S. social security benefits and as such are subject to paragraph 5 of Article XVIII of the Canada- United States Income Tax Convention (1980) (the "Convention").

With aspect to Tier 11 payments, these benefits are considered to be private pension plan benefits and are addressed by Article XVIII of the Convention. It is our understanding that in the United States contributions to such plans are not deductible for tax purposes. Conversely benefits from such plans are exempt from tax until the contributions made by the taxpayer have been fully recovered. Under paragraph 1 of Article XVIII of the Convention, a resident of Canada is exempt from tax on such benefits if they would have been excluded from his taxable income had he been a resident of the U.S. Thus, in Canada he is permitted to recover his contributions made under Tier 11 without tax. Once the contributions are fully recovered he will be subject to tax in both Canada and the United States on those benefits received in excess of his contributions.

As regards the actual reporting of the taxable amount, publication 575, issued by the Internal Revenue Service ruled "Pension and Annuity Income" states that Form RRB-W-2P, issued by the "Railroad Retirement Board" will indicate the amount taxable in the U.S. in Box 9. No amount would ordinarily be included in Box 9 until the contributions made by the taxpayer have been fully recovered. If at some point in the year the total Tier 11 benefits exceeded the Tier 11 contributions the taxable portion is included in Box 9. Therefore in the case you have submitted only XXXX will be taxable in Canada.

Where an amount is exempt from tax in Canada by virtue of a provision contained in a tax convention which has the force of law in Canada, subparagraph 110(1)(f)(i) of the Income Tax Act (Canada) (the "Act") provides that such amount may be deducted in arriving at taxable income. Thus the gross amount of Tier 11 benefits received are required to be included in income pursuant to paragraph 56(1)(a) of the Act. The portion that is exempt pursuant to paragraph 1 of Article XVIII of the Convention is deductible by virtue of subparagraph 110(i)(f)(i) of the Act in computing taxable income.

We trust these comments are of some assistance.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch