24 January 1992 Income Tax Severed Letter 89

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.

Subject: RRSP TRANSFER FROM FOREIGN RETIREMENT ARRANGEMENT Section(s): 56(1)(a), 60(j), 60.01, 89(1)(r), 248(1)]

PERSONAL

• 5- 912615 D. Duff (613) 957-8953

XXX

January 24, 1992

Re: Individual Retirement Accounts (“IRAs”)

This is in response to your letter of September 5, 1991 requesting our opinion of the income tax effects of XXX moving from the U.S. to Canada.

XXX

You suggested three different proposals for dealing with those funds. First, they could leave the IRAs in the U.S. and not withdraw anything at this time. Second, they could cash in the IRAs when they move to Canada and bring the funds with them. Third, they could start withdrawing periodic payments from the IRAs when they move. As your request deals with a specific proposed transaction it should be the topic of an advance income tax ruling, however, we can offer the following comments.

The Income Tax Act (the “Act”) has been amended by Bill C-18 which received Royal Assent effective December 18, 1991, to include numerous provisions dealing with foreign retirement arrangements. A foreign retirement arrangement is defined in subsection 248(1) of the Act to be a plan as prescribed in the regulations which still have not passed. However, the explanatory notes to Bill C-18 state that it is intended to prescribe Individual Retirement Accounts (IRAs) referred to in subsections 408(a), (b) and (h) of the U.S. Internal Revenue Code.

Normally a Canadian resident with a bank account in the U.S. would be required to include interest income earned in that account on an annual basis, either pursuant to paragraph 12(1)(c) of the Act on amounts credited to the account, or pursuant to subsection 12(4) on annual interest accruals on investment contracts as defined in paragraph 12(11)(a). Paragraph 89(1)(r) has been added to the Act to exempt from income those amounts added to or credited to a deposit or account governed by a foreign retirement arrangement as interest or other income in respect of the deposit or account. Also, paragraph 12(11)(a) has been amended to exclude foreign retirement arrangements from the definition of investment contracts. Consequently, if the IRAs meet the definition of a foreign retirement arrangement no amount will be included in income pursuant to paragraph 12(1)(c) or subsection 12(4) of the Act. Both of these changes are applicable to the 1990 and subsequent taxation years.

Clause 56(1)(a)(i)(C.1) has been added to the Act by Bill C-18 to include in income any payment out of or under a foreign retirement arrangement unless such payment would not have been included in the income of the recipient if he was a resident of the payer country. Subparagraph 6O(j)(ii) has been amended by Bill C-18 to permit the rollover to registered retirement savings plans (“RRSP”) or registered pension plans (“RPP”) of eligible amounts as defined in section 60.01. This subsection defines an eligible amount basically as a lump sum payment received, and included in income pursuant to clause 56(1)(a)(i)(C.1), from a foreign retirement arrangement resulting from contributions to the arrangement by the taxpayer or his spouse. Note that amounts that are part of a series of periodic payments from the arrangement are specifically excluded from the section 60.01 definition. These provisions are applicable to payments received after July 13, 1990.

As indicated above any payments from a foreign retirement arrangement will be included in income pursuant to clause 56(1)(a)(i)(C.1) unless they would not be taxable if the recipient was a resident of the payer country. Also, as indicated above, periodic payments from a foreign retirement arrangement cannot be rolled to a RRSP or a RPP.

We cannot comment on whether these amounts will be taxed under the U.S. Internal Revenue Code, however, taxes paid in the U.S. can result in a foreign tax credit when determining Canadian Income Taxes. Article XVIII of the Canada-U.S. Tax Convention applies to pensions and annuities paid from the U.S. to residents of Canada. Paragraph 2 restricts the U.S. withholding taxes on pensions and annuities paid to Canadian residents to a maximum of 15%.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate