21 April 1994 External T.I. 9329935 - MEANING OF "PENSION" - LUMP-SUM RRIF PAYMENT (7224-8)

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.

				File # 932993

Principal Issues:

Whether an annual pay out amount from a RRIF with a 5 year term is a "periodic pension payment" as defined in section 5 of the ITCIA and under paragraph 2(a) of Article XVIII of the Canada-US Convention.

Position TAKEN:

Not in most cases.

Reasons FOR POSITION TAKEN:

"Periodic pension payments" are defined in section 5 of the ITCIA and include payments from a RRIF; however, the annual pay out amount for a 5 year RRIF will almost always exceed the amounts calculated under subparagraphs (c)(iii) and (c)(iv) of that definition as a result of calculating the "minimum amount" for that RRIF in paragraph 146.3(1)(b.1) of the Act and section 7308 of the Regulations. Accordingly, an annual pay out amount under a 5 year RRIF will seldom, if ever, qualify as a "periodic pension payment" under section 5 of the ITCIA or paragraph 2(a) of Article XVIII of the Canada-US Convention.

932993
XXXXXXXXXX G. Middleton

Attention: XXXXXXXXXX

April 21, 1994

Dear Sirs:

We are replying to your letter in which you requested clarification on the application of sections 146.3 and 212 of the Canadian Income Tax Act (the "Act"), as well as, the Income Tax Conventions Interpretation Act (the "ITCIA") and the 1980 Canada-U.S. Income Tax Convention (the "Treaty") in respect of payments from a Registered Retirement Income Fund ("RRIF")" to a resident of the U.S. All references to the Act are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993.

You described the following hypothetical fact situation.

1.Mr. X is a resident of the United States for income tax purposes and he has a Canadian Registered Retirement Savings Plan ("RRSP"), as defined under paragraph 146(1)(i) of the Act, with a fair market value (FMV) of $1,000,000. Mr X is considering transferring the RRSP to a RRIF.

2.A RRIF may provide for various pay out terms and Mr. X desires to have a pay out term not exceeding 5 years. In this case, the pay out amounts from the RRIF will be substantially higher than a maximum 20 year term RRIF.

As indicated in paragraph 21 of Information Circular 70-6R2, when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance income tax ruling rather than an opinion. Although we cannot provide you with a specific answer, we are prepared to offer the following general comments which may be of assistance to you.

The definition of "periodic pension payment" is found in section 5 of the ITCIA. In general, the definition states that a "periodic pension payment" does not include a payment out of a RRIF where the total of all payments under the RRIF at, or before, the time of payment and in the calendar year exceeds the greater of:

(a) twice the amount that would be the "minimum amount" under the fund for the year, and

(b) 10% of the amount that would be the FMV of the property held in connection with the fund at the beginning of the year

if all property transferred in the year and before that time to the carrier of the fund as consideration under the fund had been transferred immediately before the beginning of the year and if the definition "minimum amount" in paragraph 146.3(1)(b.1) of the Act were applicable with respect to all RRIFs.

The "minimum amount" under a RRIF for a calendar year is calculated pursuant to paragraph 146.3(1)(b.1) of the Act and section 7308 of the Income Tax Regulations (the "Regulations") which was recently added to the Regulations by P.C. 1994-102 on January 20, 1994. As indicated in those provisions, it is necessary to know an annuitant's age and the FMV of the annuitant's RRIFs at the beginning of a particular year for the purposes of calculating the "minimum amount. For example, if a RRIF is worth $1,000,000 at the beginning of a particular year and its annuitant is age 71 in the year, the "minimum amount" under subparagraph 146.3(1)(b.1)(iii) would likely be $73,800 under the new rules, calculated as the FMV of the RRIF ($1,000,000) multiplied by the prescribed amount in subsection 7308(3) of the Regulations (.0738).

The amounts calculated for the purpose of determining a "periodic pension payment" in paragraphs (a) and (b) above would then be $147,600 (two times the "minimum amount" of $73,800) and $100,000 (10% times the FMV of the RRIF worth $1,000,000), respectively. Therefore, in this particular example, a "periodic pension payment" would not include a payment at any time in the particular calendar year under the RRIF where the total of all payments made under the RRIF at or before that time and in the year exceeds $147,600.

Paragraph 2(a) of Article XVIII of the Treaty states: "Pensions may also be taxed in a Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 per cent of the gross amount of such payment;......" Therefore, if a payment out of a RRIF qualifies as a "periodic pension payment", as defined under section 5 of the ITCIA, and it is paid to a resident of the U.S., the Canadian non-resident withholding tax will be 15% of such amount pursuant to paragraph 2(a) of Article XVIII of the Treaty. Any payment under a RRIF which does not qualify as a "periodic pension payment" will generally be subject to the normal 25% non-resident withholding tax rate pursuant to paragraph 212(1)(q) of the Act.

Based on our example, it appears that a payment representing an annual pay out amount under the five year RRIF described in your hypothetical situation would not be a "periodic pension payment" as defined under section 5 of the ITCIA.

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

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch