4 August 1987 Income Tax Severed Letter 7-1954 - [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.

AUG 4 1987

Legislative Affairs Directorate

ATTENTION Mr. John M. Fuke

FROM-Specialty Rulings Directorate K.B. Harding (613) 957-2129 RE: Retirement Compensation Arrangements (RCA)

This is in reply to your memorandum of July 15, 1987 concerning the treatment of an RCA under Article XVIII of the Canada-U.S. Income Tax Convention (Convention).

We have reviewed the proposed draft legislation as set out in Bill C-64 which received first reading on June 9, 1987.

Under domestic law, amounts received by a resident of Canada out of an RCA would be subject to tax in Canada pursuant to proposed paragraphs 56(1)(x), (y) and (z) of the Income Tax Act (the Act). The definition of an RCA in the proposed amendment to 248(1) of the Act clearly indicates that an RCA does not include a registered pension fund or plan. In addition, proposed subparagraph 56(l)(a)(ii) of the Act excludes the RCA from that paragraph so that amounts received out of such an arrangement could only be taxed under proposed paragraphs 56(1)(x), (y) and (z) of the Act.

In the case of a non-resident, paragraph 212(l)(j) of the Act permits a Canadian withholding tax of 25% on any amount paid out of an RCA or on the purchase price of an interest in a RCA. Such withholding tax would be subject to any relief granted to a non-resident by virtue of a provision contained in a tax convention or agreement with another country.

As you are aware, there have been no tax cases under the Convention to provide us with guidelines as to what constitutes a "retirement plan" for purposes of paragraph 3 of Article XVIII of the Convention. However, in the case of Charles A. Specht v. Her Majesty The Queen (75 DTC 5069), heard in the Federal Court, the definition of "retirement" was discussed. In that case it was stated that the dictionary definition of the word "retirement" meant "withdrawal from occupation or business activity". Accordingly, we are of the view that it can be argued that only amounts that would fall within this definition would be covered by the term "retirement plan" for purposes of Article XVIII of the Convention.

We have taken the view in previous correspondence that the terms "periodic pension benefit" and "retirement plan" in the Convention would generally mean a series of payments made for the purpose of providing the recipient with retirement income throughout his life or a greater part of his life. The underlined portion is to ensure that payments out of RRSPs and RRIFs for a term ending at age 90 would qualify as a pension benefit. In making this statement, we indicated that payments constituting "death benefits" and "retirement allowances" would not qualify as a pension for purposes of Article XVIII(3) of the Convention unless they are part of an arrangement to provide periodic income to the payee for life.

It is our view that the position taken in respect to "death benefits" and "retirement allowances" should also apply to payments which are subject to tax by virtue of proposed paragraphs 56(1)(x) and (z) of the Act. Accordingly, any amounts subject to tax by virtue of proposed paragraphs 56(1)(x) and (z) will only qualify as a pension for purposes of the Convention to the extent that it involves an arrangement to provide periodic income to the payee for life.

Other amounts subject to tax by virtue of proposed paragraphs 56(1)(x), (y) and (z) which do not qualify as a pension would in our view fall within paragraph 2 of Article XXII of the Convention and would be subject to 25 per cent withholding tax.

We trust these comments will be useful for your purposes.

Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch