11 March 1988 Income Tax Severed Letter 5-5353 - [880311]

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

March 11, 1988

Dear XXXX

This is in reply to your letter of January 11, 1988 wherein you requested our opinion concerning the treatment of certain amounts received by you.

It is our understanding that you have been a continuous resident of the United States since 1966 and you have taken up temporary employment with a Canadian company in XXXX. You indicated that you plan to move to Canada when your employment becomes permanent.

Your letter states that you still own a house in the United States where your family presently resides but you plan to sell the house in that country and move to Canada when your employment becomes permanent. You will receive a lump sum payment in the near future from your pension plan which you intend to roll into an Individual Retirement Account (IRA) and such amount will not be subject to tax in the United States.

You requested confirmation of the following questions:

1. Whether or not you will be subject to Canadian income tax at the time your U.S. lump sum pension payment is rolled into an IRA?

2. Whether or not the disposition of your house in the U.S. will not be subject to Canadian capital gains tax?

3. Will the amounts received out of an IRA by a resident of Canada be subject to 15% non-resident withholding tax in the United States?

It is our view that amounts received out of a pension fund or plan must be included in the income of a resident of Canada. However, pursuant to paragraph 1 of Article XVIII of the Canada-U.S. Income Tax Convention (1980) (Convention), Canada would allow a deduction from income for amounts rolled into an IRA provided those amounts would be excluded from income in the United States. It is our understanding that the U.S. presently provides for the exclusion of pension income for amounts rolled into an IRA. In order to receive this exemption, it would be necessary for you to provide satisfactory evidence that you meet the qualifications set out above. We are forwarding a copy of the relevant article of the Convention for your perusal.

We are attaching a copy of Interpretation Bulletin IT-120R3 which deals with the disposition of a principal residence. The term "principal residence" is defined in paragraph 3 of that Bulletin. Paragraphs 2 and 40 of that Bulletin deal with the treatment of the disposition by a Canadian resident of a principal residence located outside Canada. It should be noted that when you become a resident of Canada, only the gain which arises after you become a resident of Canada is subject to tax in Canada. Provided your family resides in the home until it is sold, the residence will qualify as a principal residence and any capital gains arising will not be subject to tax in Canada. However, if the home is rented out prior to becoming a resident of Canada it will not be a principal residence and you will be subject to any capital gains that arise after you become a resident of Canada.

The Convention provides that both Canada and the United States has the right to withhold 15% on periodic pension payments made to a resident of the other country, however, there is no limit on amounts to be withheld on lump sum pension payments. It is our understanding that the U.S. has the right to withhold 30% on such lump sum payments. Since we cannot speak for the U.S. interpretation of the Convention, we would suggest you contact the IRS for a reply to this question.

You have requested we respond to the above questions as soon as possible since you have a deadline of March 31, 1988 to make the required transfer. We will respond to the remaining question in your letter when the treatment of IRAs is finalized in this office.

We trust these comments are suitable for your purposes.

Yours truly,

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