22 January 1990 External T.I. 59190 F - Canada-U.S. Income Tax Convention - Retirement Compensation Arrangement

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.

January 22, 1990

Dear Sirs:

Re:  Article XVIII 1980 Canada - U.S. Income Tax Convention  (the "U.S. Convention") Retirement Compensation Arrangement ("RCA")

This is in reply to your letter of November 30, 1989 requesting our views on the interpretation to be given to the terms "retirement plan" and "periodic pension payment" contained in Article XVIII of the U.S. Convention.

You describe a hypothetical situation in which the gross amount contributed to an RCA trust, together with any growth thereon, is required to be distributed in 1990 to a U.S. resident in eight equal monthly payments. Of the eight payments, four would be made at the stated monthly intervals. However, because the trust would then have insufficient funds to make  the remaining four payments, the total of these four payments would not be paid until Revenue Canada has refunded the amount withheld by the contributor pursuant to subsection 153(1) of the Income Tax Act (the "Act"). You ask us to confirm that the above described payments will represent "periodic pension payments" such that the 25% tax exigible under paragraph 212(1)(j) of the Act will be reduced to 15% pursuant to paragraph 2(a) of Article XVIII of the U.S. Convention.

It is our view that the rate of tax on the amounts paid to a U.S. resident in a situation such as that described above would be 25%.  The reasoning for this view is reflected in the following general comments.

There have been no tax cases dealing with the U.S. Convention that provides guidelines as to what constitutes a "retirement plan" for the purpose of paragraph 3 of Article XVIII thereof. Generally speaking, it is our view that where payments are received under an RCA as a result of retirement, such payments would be considered to have been made from a retirement plan. It is a question of fact as to whether amounts have been received under an RCA as a result of retirement rather than as a result of loss of office or resignation, etc. A review of all relevant documentation would be required in order to make such a determination. Such a review would be made by the relevant district taxation office where a completed transaction is involved, or by this office where the arrangement is the subject matter set out in Information Circular 70-6R. In Specht v. The Queen (75 DTC 5069), the comments of the Federal Court on the meaning of retirement mat be useful in making this determination.

It has been our position for a number of years that the term "periodic pension payment" in the U.S. Convention means a series of payments made for the purpose of providing the recipient with retirement income throughout his life or the greater part of his life. Thus, where payments are made to a U.S.resident under an RCA that qualifies as a retirement plan , the tax on such payments will be reduced to 15% only where they are part of a series of payments to be made for the greater part of the recipient's life. Since that is obviously not the case in the above described situation, the eight monthly payments would be subject to a 25% tax.

The above comments reflect expressions of opinion only and are not binding on the Department, as stated in paragraph 24 Information Circular 70-6R. We trust however that they are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate