5 March 1997 External T.I. 9634955 - TRANSFER FROM IRA TO RRSP

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.

Principal Issues:

Can an amount be transferred from an IRA to and RRSP?

Position:

Yes, if all the conditions of 60(j)(ii) are satisfied

Reasons:

60(j)(ii) permits a deduction for amounts transferred to RRSP out of a FRA. However, amounts will likely be subject to U.S. withholding taxes and may also be subject to penalty taxes if taxpayer under age of 60.

		963495
XXXXXXXXXX	M.P. Sarazin

March 5, 1997

Dear Sir/Madam:

This is in reply to your letter dated October 10, 1996, wherein you requested information regarding the lump-sum transfer of an amount held in your personal U.S. individual retirement account ("IRA") to a Canadian registered retirement savings plan ("RRSP"). You are currently a citizen and a resident of Canada. The amount held in the IRA represents amounts rolled into the IRA from your U.S. employer's IRA ("Employer IRA") and all contributions to the IRA and the Employer IRA were made during a period when you were a landed immigrant employed and resident in the United States.

The Income Tax Act (Canada) (the "Act") and the Internal Revenue Code of the United States do not provide for the tax-free rollover of lump-sum amounts from a retirement plan in one country to a retirement plan in the other country. A lump-sum payment out of an IRA to a Canadian resident may be subject to U.S. withholding taxes.

IRAs established pursuant to the U.S. Internal Revenue Code of 1986 are prescribed to be "foreign retirement arrangements" ("FRA") for purposes of the Act. An individual is required to include all amounts received out of or under a FRA as a superannuation or pension benefit (whether a lump-sum payment or periodic payment) in his or her income under the provisions of clause 56(1)(a)(i)(C.1) of the Act. The amount of the lump-sum payment to be included in the recipient's income is the gross amount, before U.S. withholding taxes, paid out of the IRA.

Where the conditions of paragraph 60(j) of the Act are satisfied, an individual is entitled to deduct an amount equal to the portion of the lump-sum payment out of a foreign pension plan or a FRA that is transferred to an RRSP thereby offsetting all or a portion of the income inclusion under subparagraph 56(1)(a)(i) or clause 56(1)(a)(i)(C.1) of the Act. The amount that may be deducted under paragraph 60(j) of the Act is restricted to the amount transferred to a RRSP in the year of receipt or within 60 days after the end of the year of receipt.

Subparagraph 60(j)(i) of the Act permits a deduction for the portion of a lump-sum payment out of a foreign pension plan where the pension is attributable to services rendered during a period throughout which the individual was not resident in Canada and the lump-sum pension payment is not exempt from Canadian income tax by virtue of a provision contained in a tax convention with the other country. The Act makes reference to the term "superannuation or pension fund or plan" but the expression is not defined for purposes of the Act. The courts have generally looked at the dictionary definitions of the words "superannuation" and "pension" in determining whether or not a superannuation or pension fund or plan exists. In general, a superannuation or pension fund requires that contributions be made to a plan or arrangement by an employer for the purpose of providing regular payments to the employee on his or her retirement from employment. The determination of whether a plan or arrangement would constitute a foreign pension plan for purposes of the Act is a question of fact. If your IRA is a foreign pension plan then subparagraph 60(j)(i) would allow for the transfer of the lump-sum receipt.

Subparagraph 60(j)(ii) of the Act permits a deduction for the portion of a lump-sum payment out of a FRA that can reasonably be considered to derive from contributions to the FRA made by the taxpayer or the taxpayer's spouse or former spouse. We have previously taken the position that amounts transferred to an IRA from a U.S. pension plan at the direction of the taxpayer satisfies the requirement that the lump sum must have been derived from contributions made to the IRA by the taxpayer even though the amount transferred from the U.S. pension plan consists of employer contributions or a combination of employer and employee contributions. Consequently, the portion of the lump sum withdrawal from the IRA attributable to the amount transferred from the Employer IRA and the contributions, if any, made by you or your spouse or former spouse would qualify for the transfer under subparagraph 60(j)(ii) of the Act. We would like to advise you that the position is currently under review. However, any changes to the position would only be applied prospectively.

The taxes withheld by the administrator of the IRA is considered to be non-business taxes paid to the United States. Consequently, an individual may be entitled to claim a foreign tax credit with respect to U.S. withholding taxes deducted from any lump-sum withdrawal from an IRA. The foreign tax credit is generally computed as the lesser of the foreign taxes paid and a proportion of the Canadian taxes paid. The proportion is the taxpayer's foreign income divided by the taxpayer's total adjusted income. We note that, in determining the proportion, the foreign income is not reduced by the amount of the deduction under paragraph 60(j) of the Act. The enclosed Interpretation Bulletin IT-270R2 will provide you with the Department's general views on the computation of the foreign tax credit.

In the event that an individual is not able to claim a foreign tax credit for the full amount of U.S. withholding taxes, the individual may be allowed to claim a deduction under subsection 20(12) of the Act for an amount equal to the amount by which the U.S. withholding taxes exceed the foreign tax credit claimed. We are also enclosing a copy of IT-506 which provides the Department's general views with respect to the deductibility of foreign income taxes.

We can only provide you with technical interpretations with respect to the application of the Act. Consequently, you will have to make your own determination as to whether or not a particular course of action is appropriate or inappropriate in your circumstances.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

ENCLOSURES