2 March 1989 Income Tax Severed Letter 7-3320 - [Part XI.3 Tax Retirement Compensation Arrangements]

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.

DATE MAR - 2 1989

TO Provincial & International Relations Division

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

Mr. R.G. D'Aurelio Director

SUBJECT: Part XI.3 Tax Retirement Compensation Arrangements (RCA)

This is in reply to your memorandum of September 28, 1988 wherein you requested our views on the treatment of the above tax under the Canada-U.S. Income Tax Convention (the "Convention").

It is our understanding that you are concerned with a situation where a Canadian company pays into a retirement plan that is operated by or for its parent company in the United States for senior personnel of the parent and its foreign and domestic subsidiaries. Where such a plan constitutes an RCA you are concerned that the new Part XI.3, which is a tax on the custodian of the plan, may be a tax on capital and not a tax on the income of the plan.

If it is determined that the Part XI.3 tax is a tax on capital, paragraph 4 of Article XXIII of the Convention would prevent Canada from levying such tax under the Convention except where the RCA, which is resident of the United States, invested in real property located in Canada or fell within paragraphs 2 or 3 of that article.

Paragraph 153(1)(p) of the Act requires the employer to withhold tax on behalf of the custodian with respect to contributions made to the RCA. This would, in our view clearly indicate that the tax is taxed on amounts contributed to the RCA rather than a tax on the capital held by custodian.

Subsection 207.7(1) of the Act also imposes a tax for a taxation year of an RCA equal to the amount by which the refundable tax at the end of the year exceeds the refundable tax at the end of the immediately preceding taxation year. Basically, where the employer withholds tax on amounts contributed to the plan the only tax owing by the custodian in a taxation year would be an amount equal to 50 per cent of the income earned by the custodian. Clearly this is not a tax on the capital held by the custodian but is a tax on the income earned on that capital. In determining whether a particular tax is a tax on income or a tax on capital should be determined on the nature of the tax rather than who has the responsibility for paying the tax.

It is our view that the reference to a tax on "capital", for purposes of income tax conventions or agreements, refers to a "wealth" tax which is clearly distinguishable from a tax on contributions to or the income earned by the custodian. This view is supported in paragraph 69 of Article 23 of the Commentary to the OECD Model which refers to "... capital taxes only on domestic assets ...". (Underlining for emphasis only)

It is our view that the legal opinion provides some support for our position as well as other arguments which could be made to support that view. In view of the fact that any cases which may be taken to Court would be taxpayers attempting to circumvent the RCA rules, the Court could well rule in our favour in such cases.

We trust this is adequate for your purposes.

for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch