29 April 1996 External T.I. 9614485 - PART XIII - RRSP OF DECEASED NON-RESIDENT

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.

XXXXXXXXXX 961448

Attention: XXXXXXXXXX

April 29, 1996

Dear Sirs:

Re: Taxation of RRSPs of Deceased Non-Resident

This is in reply to your facsimile dated April 22, 1996. You request our views concerning Canadian withholding taxes applicable where amounts are paid out of a Canadian registered retirement savings plan ("RRSP") to the estate of a deceased non-resident under the following set of circumstances.

1) The deceased was formerly a resident of Canada.

2) While resident in Canada the deceased contributed amounts into a RRSP account sponsored by a Canadian financial institution.

3) The RRSP account derived income in the form of dividends and interest from the investments held therein.

4) At the time of death the deceased was a citizen and resident of the United States and was a non-resident of Canada. At that time the deceased had no spouse.

5) The funds in the RRSP accounts are paid out to the deceased's estate in the year following the year of death.

You question whether the reduced rates of withholding tax for interest and dividends as set out in the Canada - U.S. Income Tax Convention (the "Convention") apply to the amounts paid to the deceased's estate from Canadian RRSP accounts.

Our Comments

A RRSP is essentially a trust governed by a RRSP (a "RRSP trust"). Pursuant to subsection 104(2) of the Canadian Income Tax Act (the "Act") a trust is deemed, in respect of the trust property, to be an individual. Special rules are provided under the Act which apply to RRSP trusts (e.g they are exempt from tax) however the fact remains that the income derived by a RRSP trust, is income of such trust and not that of the individual who makes the contributions (the "Annuitant"). Moreover, under the Act, distributions from a RRSP trust to an Annuitant are income from the RRSP trust. Such distributions do not retain the character of the income (e.g. interest and dividends) to the RRSP trust to which they are partly attributable.

Generally speaking, paragraph 212(1)(l) of the Act provides that a payment to a non-resident out of a RRSP is taxable at the 25% rate provided under Part XIII of the Act, to the extent that such payment would if the non-resident had been resident in Canada, be required to be included in computing the income of the non-resident person for the year. Subsection 146(8.8) of the Act provides that where an annuitant (who has no spouse) under a RRSP dies, he shall be deemed to have received, immediately before his death an amount as a benefit under the plan equal to fair market value of the property of the plan at the time of death.

The application of subsection 212(1) of the Act requires a payment to have been made to the non-resident. Therefore paragraph 214(3)(c) of the Act deems the amount deemed to have been received pursuant to subsection 146(8.8) of the Act, to have been paid to the non-resident for the purposes of Part XIII of the Act (of which paragraph 212(1)(l) is a part).

When the funds in the RRSP are actually paid out (provided this is done before the end of the year following the year of death) to the non-resident estate, they are taxable under subsection 146(8) and paragraph 212(1)(l) of the Act to the extent that they were not already subject to tax pursuant to subsection 146(8.8) and paragraph 212(1)(l) of the Act as set out above. Normally, the amount taxed at this time is the income earned by the RRSP trust since the death of the Annuitant.

The Convention

It is Revenue Canada's view that a RRSP is a "pension" for the purposes of Article XVIII of the Convention. Moreover the amounts subject to tax under 212(1)(l) of the Act as set out above would not qualify as a "periodic pension payments" for the purposes of paragraph 2 of Article XVIII of the Convention. Therefore the reduced rate of 15% referred to in that paragraph would not apply. As indicated earlier, the source of the funds in a RRSP are in our view not relevant in characterizing distributions from a RRSP. Therefore Articles X (Dividends) and XI (Interest) are not applicable notwithstanding the distributions from a RRSP trust may be attributable to dividend and interest income earned by the RRSP trust.

Section 217 of the Act

In certain circumstances, a non-resident individual who has received Canadian source income subject to tax under Part XIII of the Act may benefit from an election under section 217 of the Act. The election generally benefits a non-resident whose effective personal rate of tax, if he or she could file as a resident of Canada would be lower than the tax withheld at source pursuant to subsection 212(1) of the Act. However, such election is generally beneficial only to non-residents of relatively modest income. The section 217 election must be filed within six months of the end of the calendar year in respect of which the election is made. If you wish to obtain additional information concerning the section 217 election, please telephone the International Taxation Office of Revenue Canada at 1-800-267-5177.

We are attaching the relevant excerpts from the Act as you requested.

We hope that the above is of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch