29 August 1988 Income Tax Severed Letter 95-5067 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:

This is in reply to your letter of May 17, 1988 wherein you requested our views as to the withholding tax rate due on a distribution by a Retirement Compensation Arrangement (RCA) to a resident of a jurisdiction with which Canada has entered into a tax agreement or convention.

In the case of a non-resident, paragraph 212(1)(j) of the Act permits a Canadian withholding tax of 25% on any amount paid out of an RCA or on the purchase price of an interest in a RCA. Such withholding tax would be subject to any relief granted to a non-resident by virtue of a provision contained in a tax convention or agreement with another country.

As you are aware there have been no tax cases under the Canada-U.S. Income Tax Convention (1980) (Convention) to provide guidelines as to what would constitute a "retirement plan" for purposes of paragraph 3 of Article XVIII of the Convention. It is our view that where amounts are paid out of an RCA and such amounts are received as the result of withdrawing from business or active life (i.e. retired) such payments would be considered to have been made from a retirement plan. The question as to whether the amounts from an RCA were received as a result of retirement, loss of office, resignation, etc. would be a question of fact. In the case of "Specht v. The Queen, 75 DTC 5069, the Federal Court discusses the question of what constitutes retirement and may be used in making this determination. Where amounts received out of an RCA are considered to be in the form of retirement benefits, it is our view that such an RCA would constitute a "retirement plan". Accordingly, such an RCA would be considered as a "pension" for purposes of paragraph 3 of Article XVIII of the Canada-U.S. Income Tax Convention (Convention).

We are of the view that the term "periodic pension payment" in the Convention means a series of payments made for the purpose of providing the recipient with retirement income throughout his life or a greater part of his life. The underlined portion is to ensure that payments out of RRSPs and RRIFs for a term ending at age 90 would qualify as periodic pension payments. Where payments are made from an RCA that qualifies as a "retirement plan", such payments will be subject to 25% withholding tax when paid to a non-resident. Where payments are made to U.S. residents such payments would be eligible to the reduced rate of 15% only where the payments qualify as "periodic pension payments".

Since it was not clear whether the word "trust" in the phrase "estate or trust", used in paragraph 2 of Article XXII of the Canada-U.S. Income Tax Convention (Convention) and in other tax treaties, was applicable to trusts designated for specific purposes under the Income Tax Act, we contacted the negotiators to determine the intent when using this term in the tax treaties. They indicated that paragraph 2 was designed to ensure that interest and dividends earned in an estate or trust would not attract more tax than if received directly by the individual. In addition, they indicated that it was never the intent for trusts described in subparagraphs 108(1)(j)(i) to (v) of the Act to fall within paragraph 2 of Article XXII of the Convention or a similar paragraph in other tax treaties. In fact, paragraph 3 of Article XX of the Canada-U.K. Tax Convention was added to clarify this matter for purposes of that Article. Therefore, in our opinion paragraph 1 of Article XXII of the Convention applies to amounts received out of a RCA except for those payments out of a RCA which qualify as a pension benefit as set out in the immediately preceding paragraph and paragraph 2 of that Article does not apply.

It is our view that payments made out of an RCA to a resident of the U.K. do not fall within the definition of "trust" for purposes of Article XX of the Canada U.K. Tax Convention for the reasons set out in the above paragraph. Since there is no "Other Income" article in the Canada-U.K. Tax Convention, there is no provision to grant relief for distributions made out of an RCA to a U.K. resident. Accordingly, unless the payments qualify as a periodic pension payment out of a retirement plan, the payments would be subject to 25 per cent withholding tax.

We trust these comments are suitable for your purposes.