7 May 1986 Income Tax Severed Letter 95-3149 F

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.

Dear Sirs:

RE:     Non-Resident Tax

This is in reply to your letter of March 10, 1987 and further to our telephone conversation of May 8, 1987 concerning withholding taxes on a payment to be made to your client XXX out of an Investors Plan issued by XXX which includes as part of its benefits and investments a registered retirement savings plan (RRSP) and a life insurance policy.

Our Comments

As discussed during our telephone conversation, any amount paid out on the surrender of a plan such as that referred to above is considered to be partly a payment out of an RRSP and partly a payment out of a life insurance policy to the extent of the growth in the two parts of the plan. However as you did not include documents related to the RRSP or a copy of the life insurance policy we can only generalize our reply. As a starting point we would suggest you contact XXX and ask then for a detailed explanation of the expected payout to be received on surrender of the Investors Plan.

With respect to taxation on the surrender or collapse of an RRSP, paragraph 212(1)(1) of Part XIII of the Income Tax Act (the "Act") provides for a non-resident withholding tax of 25% on payments out of an RRSP. As pointed out during our telephone conversation, no part of a payment out of an RRSP is considered a return of capital, thus the whole payment is subject to tax. Under Article XVIII of the Canada U.S. Income Tax Convention withholding tax on periodic payments out of a retirement plan is reduced to 15%. If relief cannot be obtained under this article then the withholding remains at 25%. However, as your client may be able to file a section 217 election we have enclosed a copy of Interpretation Bulletin IT-163R2 which outlines the election procedures.

On the other hand where payments are made, other than on death, to a non-resident on the disposition of an interest in a life insurance policy they are subject, pursuant to subsection 116(5.2) and (5.3) of teh Act, to a withholding at Part I of the Act rates. Withholding in these cases is required to be made by the insurance company. See photo copies of form T2062B that we have enclosed for your information.

The exact amount of the non-resident policyholder's tax liability on surrender of a life insurance policy is determined pursuant to section 115 of Part I of the Act. It is under this section that a policyholder must file a return to determine his exact income tax liability on the insurance policy proceeds and at which time he pays any balance owing or claims a refund of any overpayment of tax that may occur under section 116 of the Act.

As requested, we have enclosed Information Circular 71-17R2 in order for you to review competent Authority procedures.

As requested, we have enclosed Information Circular 71-17R in order for you to review competent Authority procedures.

We trust the foregoing explanation will be of assistance to you.