3 February 1989 Income Tax Severed Letter 7-3246 -  

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.

TO MISSISSAUGA DISTRICT OFFICE Appeals DIvision

Attention: Martina Urbanck

FROM Specialty Rulings Directorate K. Larding 957-2129

SUBJECT: Treatment of a payment from an IRA

This is in reply to your round trip memorandum dated September 9, 1988 concerning the treatment of amounts received out of an IRA by the above taxpayer.

We understand that XXXX is a resident of Canada and received a lump sum payment from an IRA. The amount received out of the IRA represented a rollover of amounts received out of a 401(k) plan prior to his departure from the U.S. in 1985.

It is our view that amounts received out of a 401(k) plan would be considered as superannuation pension payments for purposes of paragraphs 6(1)(g) and 56(1)(a) of the Income Tax Act (Act). It continues to be our position that the nature of the income cannot be changed when a taxpayer rolls an amount from a 401(k) plan to an IRA and subsequently withdraws that amount from the plan, whether in the form of an annuity or lump sum payments.

This position applies even where an individual makes a roll-over from a 401(k) plan to an IRA prior to the individual becoming a resident of Canada.

We have considered the argument of whether the 1942 Canada-U.S. Income Tax Convention (Convention) would produce a different result. It would appear that a lump sum payment out of an IRA would not qualify as a "pension" as that term is defined in paragraph 7 of the Protocol to the Convention since it is not a periodic payment. Accordingly, paragraph 1 of Article XI of the Convention would apply. Since the only relief granted under Article XI is a reduction of U.S. withholding tax to 15%, we are of the view that the lump sum payment received by XXXX is subject to tax in Canada.

The fact that the funds represent employees contribution to the plan would not change the fact that the amounts are received out of a superannuation or pension plan and are subject to tax in Canada pursuant to subparagraph 56(1)(a)(i) of the Act. It should also be noted that the employee's contribution to the 401(k) plan are not paid out of tax paid income since such contributions are now included in the taxpayer's income for U.S. tax purposes where the employee chooses to contribute to the plan.

In summary, it is our view that the payments received by XXXX will be subject to tax in Canada as an amount received from a superannuation or pension plan and no relief from such taxation is provided under either the 1942 or present tax treaty between Canada and the United States.

We trust these comments are adequate for your purposes.

K.H.M.

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