23 October 1989 Income Tax Severed Letter 7-3632 - [Foreign Retirement 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

This is in reply to your memorandum of February 2, 1989, wherein you requested our views on the Canadian tax treatment of amounts received for a certain retirement arrangement. We apologize for our delay in replying.

Our understanding of the facts is as follows:

XXX

Your Opinion

You believe that the future benefits from XXX plan will constitute pension payments for the purposes of the Canada-U.S Tax Convention (1980)(the "Treaty"). Accordingly, it is your view that XXX should withhold 15% of the gross payments to the taxpayer.

For Canadian tax purposes, it is your view that the XXX plan qualifies as an Employment Benefit' Plan ("EBP") and a Superannuation or Pension Plan ("SPP"). In this regard, you believe that the payments should be taxed as a combination of pension income by virtue of paragraph 56(1)(a) and EBP benefits by virtue of paragraph 6(1)(g). However, any of the taxpayer's capital contributions, which would otherwise be part of his taxable income, would be exempt from tax in Canada by virtue of paragraph 1 of Article XVIII of the Treaty.

Our Opinion

The provisions of Article XVIII of the Treaty limit the taxability by Canada of both pension and annuity payments received by a Canadian resident from a U.S. source. When a pension payment is received it must be included in income under paragraph 56(1)(a) of the Act. However, by virtue of the Joint operation of section 1 of Article XVIII of the Treaty and subparagraph 110(1)(f)(i) of the Act, the amount taxable may be reduced by the amount that would be excluded from taxable income in the U.S. if the recipient had been a resident of that country. When an annuity payment is received it is not afforded the same exemption but is taxable in accordance with the provisions of the Act as they apply to annuities in general and in particular, paragraph 56(1)(d) and 60(a) of the Act.

In the present case, the documentation that has been provided is limited. However, it appears from the U.S. annuity company's letters and your comments that the "annuities" in question arc "Tax Sheltered Annuities" acquired under the provisions of subsection 403(b) of the U.S. Internal Revenue Code (the "Code"). Tax Sheltered Annuities are acquired by certain U.S. non-profit employers in lieu of normal pensions. In brief, these annuities act to provide pensions to the employees of these organizations but, at the same time, provide a portability which is considered necessary.

Tax Sheltered annuities must be purchased by the employer and must provide the employee with rights which are nonforfeitable except on default of premiums. They must also be acquired under the terms of a plan which complies with a number of the subsection 401(a) provisions of the Code which are generally applicable to pension plans.

In our opinion it would be reasonable to take a general position that Tax Sheltered Annuities are acquired and paid out of or under the provisions of pension plans. Payments, therefore would be treated as pension payments under the provisions of the Treaty. Paragraph 3 of Article XVIII of the Treaty In our view, supports this position

Adding to the complexity of your case is the fact that the taxpayer apparently continued to make premium payments under his Tax Sheltered Annuity Program after he had left the employ of his originating U.S. employer. It is not clear from the details provided whether or not these continued payments were made to the tax sheltered annuity. From the letters it is evident that more than 1 annuity exists; however, we do not know if they were all acquired originally by the taxpayers former employer. As noted above, a Tax Sheltered Annuity must be acquired by the employer otherwise it will only be an ordinary annuity for Canadian taxation purposes. Where payments are continued to a sheltered annuity it is our opinion that a reasonable assessing position would be to apportion receipts as being on account of pension or annuity on the basis of the employer and employee contributions made before and after termination of employment.

As noted above, any annuity income portion of any payments will be included in the taxpayer's income by virtue of paragraph 56(1)(d), and the taxpayer will obtain a deduction under paragraph 60(a) (computed in prescribed manner) for the portion thereof that represents his return of capital.

The pension income portion of any payment will be included in the taxpayer's income by virtue of paragraph 56(1)(a). The portion thereof that represents a return of the taxpayer's contributions to the XXX plan will be exempt from income tax in Canada in accordance with paragraph 1 of Article XVIII of the Treaty. The offsetting deduction is provided under paragraph 110(1(f) of the Act.

We trust this information will be of assistance to you.