24 February 1989 Income Tax Severed Letter 5-6597 - [890224]

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.

REVENUE CANADA TAXATION DE SERVICE

DATE FEB 24 1989

TO Provincial and International Relations Division

Mr. R. D'Aurelio Director

FROM  Specialty Rulings Directorate 
             K.B. Harding
            957-2129

We recently received a submission from XXXXXXXX concerning the treatment of retirement funds where employees are transferred between Canada and the United States. He has outlined several problems which arise where a company transfers individuals between the two countries and has suggested some proposed solutions.

In addition, he has indicated that the Canada-U.S. Income Tax Convention (the "Convention") does not adequately deal with private retirement plans and that the term "periodic pension payment", as used in Article XVIII of the Convention should be clarified since both countries are treating the term differently.

XXXX has specifically set out the following problems which need to be addressed and he has suggested an amendment to the Convention to resolve such problems.

1. Canadians temporarily resident in the United States

Where Canadians are transferred to the United States and have a vested interest in Canadian RPPs, EBPs and RCAs, they are subject to U.S. tax on the annual increase in the value of their vested interest accrued in the plan but not paid to them while a resident of the United States. This creates a mismatch of income for foreign tax credit purposes.

2. U.S. Citizens resident and employed in Canada

Such taxpayers who are members of a Canadian plan (RPP, EBP or RCA) would not be exposed to current U.S. tax on increases in the actual value of his vested interest in Canadian defined benefit plans or employer contributions to deferred contributions plans. However, taxpayers may wish an opportunity to recognize for U.S. tax purposes accruing pension credits sufficient to absorb available foreign tax credits and increase the "cost basis" of their plans.

3. U.S. citizens temporarily resident and employed in Canada

Where such individuals are members of a 401(k) plan, the plan may have the appearance of a salary deferral arrangement or retirement compensation arrangement for Canadian taxation purposes while it is a qualified plan for pension purposes in the United States.

Others

4. Article XXIX(5) permits a deferral on income accrued in RRSPs in the United States where the taxpayer so elects, however, the rule does not apply to RRIFs which may also be exposed to tax on such accruals.

5. Revenue Canada has taken the position that earnings in an IRA trust owned by U.S. immigrants will be subject to paragraph 94(1)(d) of the Act even though paragraph 75(3)(c) of the Act exempts such trusts from tax in the year. Presumably it was intended that these amounts be taxed on a received basis.

6. Withholding tax on "periodic pension payments" is 15% of the gross amount of the payments. While that term is not defined, Revenue Canada has taken the position that it must be a payment based on life expectancy. This matter is being interpreted differently in the U.S. who use Article XXII to cover the treatment of pension payments rolled to an IRA and subsequently paid out to a resident of Canada. Accordingly, the terms pension and periodic pension payments should also be clarified.

XXXX

for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch