27 November 1989 Income Tax Severed Letter 7-4504B

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.

This is in reply to your memorandum of November 10, 1989 concerning the meaning of the term "pension" for the purposes of the referenced treaties.

The particular situation involved is one where annuity payments are being made to a U.K. resident under a registered retirement savings plan ("RRSP"). With respect thereto, you ask the following:

A. Does Article XVII(1) of the U.K. Treaty apply to exempt the payments from Part XIII tax on the basis that they are "pension" payments or, since the payments represent an annuity" as defined in that treaty, are the payments subject to a 10% tax pursuant to Article XVII(2) of the treaty.

B. If the payments were being made to U.S. resident, would the reduced rate of 15% under Article XVIII of the U.S. Treaty apply.

C. Would the answers to A and B above be the same if the annuity payments were being made under a registered retirement income fund ("RRIF").

For the purposes of the U.K. and U.S.A. Treaties, we are of the view that both an R.R.S.P. and an R.R.I.F. are "retirement plans". With this in mind, our comments with respect to your queries are as follows:

U.K. Treaty

1. RRSP Payments
• (a) Under Article XVII(3) of the U.K. Treaty, any periodic or other payment under a retirement plan (e.g., RRSP or RRIF) is a "pension", except to the extent that the payment is in settlement of all future entitlements under the plan. Thus, an annuity purchased with RRSP funds or any other payment under an RRSP to a U.K resident would represent a pension payment exempt under Article XVII(1) of the U.K. Treaty from Part XIII tax, except to the extent that it is a commutation of future annuity payments. In this latter case, the commutation payment would be subject to a 25% tax pursuant to paragraph 212(1)(l) of the Act, except to the extent that the exclusion in that paragraph applies.
• (b) While periodic payments under an RRSP will also represent an "annuity" within the meaning given to that term in Article XVII(4) of the U.K. Treaty, those payments will nevertheless be exempt, as stated in (a) above, from the 10% tax otherwise exigible under Article XVII(2) of that treaty. It is our view that a tax cannot be imposed under one provision of a treaty when another provision in the treaty provides an exemption.

Conclusion: An annuity purchased with RASP funds or any other payment under an RRSP flows tax-free to a U.K. resident, unless the payment is in respect of a commutation of future annuity payments. In the latter case, the payment is subject to a 25% tax to the extent mentioned in (a) above.

2. RRIF Payments
• (a) As noted in 1(a) above, any periodic or other payment under an RRIF is a pension except to the extent that the payment is in settlement of all future entitlements. it is our view that any withdrawals out of an RRIF in excess of the minimum annual amount represent such a settlement. Thus, only the minimum annual amounts payable under an RRIF flow tax-free to a U.K., resident under Article XVII(1) of the U.K. Treaty.
• (b) Under the definition of "annuity" in Article XVII(4) of the U.K. Treaty, payments out of an RRIF in excess of the minimum annual amount are not an annuity for the same reason they are not a pension (see 2(a) above). Whether or not periodic payments under an RRIF of the minimum annual amounts would represent an annuity under the U.K. Treaty is a moot point given that they would flow tax-free as pension income for the reason set out in 1(b) above.

Conclusion: A payment to a U.K. resident of the minimum annual amount payable under an RRIF flows tax-free to the U.K. resident. Any payment under an RRIF in excess of the minimum annual amount is subject to a 25% tax pursuant to paragraph 212(1)(q) of the Act.

U.S. Treaty

3. RRSP Payments
• (a) Under Article XVIII(3) of the U.S. Treaty, any periodic or other payment under a retirement plan (e.g., an RRSP or RRIF) is a "pension". However, the reduced 15% rate under Article XVIII(2)(a) of the treaty applies only where the payment is periodic.
• (b) Under the definition of "annuities" in Article XVIII(4) of the U.S. Treaty, excluded therefrom is any annuity the cost of which was deductible for the purposes of taxation in Canada. In our view, this excludes all annuity payments under an RRSP in that the annuity is purchased with RRSP funds that originated from contributions that were deductible.

Conclusion: A periodic payment to a U.S. resident under an RRSP is subject to a 15% tax. Otherwise, the payment is subject to a 25% tax under paragraph 212(1)(1) of the Act, except to the extent that the exclusion in that paragraph applies.

• 4. RRIF Payments
• For the reasons given in 3(a) and (b) above, it is our view that payments to a U.S. resident under an RRIF will qualify for the reduced 15% tax only if they represent periodic payments. Otherwise, they are subject to a 25% tax pursuant to paragraph 212(1)(q) of the Act.

As indicated in 1 and 2 above, whether or not a payment to a U.K. resident under an RRSP or RRIF is periodic is irrelevant. It is relevant, however, for the purposes of the U.S. Treaty (as indicated in 3 and 4 above) and for the purposes of those treaties where the terms "annuity" and "pension" are not defined. me question of whether or not a payment is periodic is currently under review. As mentioned to you during our telephone conversation (Delorey/Power), we have recently (Nov. 16, 1989) requested the views of the Provincial and International Relations Division on this matter. We will advise you once the issue is resolved.