10 July 1997 External T.I. 9713295 - IRA, DEATH, RIGHT OR THING

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:

1) Is an interest in an IRA that is an FRA a right or thing for purposes of subsection 70(2)?

2) Would non-resident beneficiaries be taxed in Canada on IRA receipts where IRA transferred to beneficiary under subsection 70(3)?

Position:

1) Yes
2) No

Reasons:

1) Position previously taken.

2) No provision which taxes amount received by non-resident.

971329
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

July 10, 1997

Dear Sirs:

Re: Individual Retirement Account and Death of Canadian Resident Owner

This is in reply to your letter dated May 16, 1997, wherein you requested our comments with respect to the taxation of amounts held by a Canadian resident in a U.S. individual retirement account on his or her date of death.

The expression "individual retirement account" (hereinafter referred to as an "IRA") is a term used for certain retirement plans in the United States. IRAs referred to in 408(a), (b) or (h) of the United States Internal Revenue Code of 1986 are prescribed to be foreign retirement arrangements ("FRA") for purposes of the Income Tax Act (the "Act"). We will restrict our comments to IRAs that are prescribed to be FRAs for purposes of the Act.

It is our understanding that, generally, FRAs are depositary or trusteed plans whereunder the owner can request payment of the full amount held in the plan at any time. However, when the owner of an FRA turns seventy and one-half years of age (the "Maturity Date"), he or she must choose by April 1 of the following year to withdraw the entire balance in the FRA or contract to withdraw periodic distributions ("Periodic Distributions") out of the plan.

The determination of whether an FRA would constitute a "right or thing" within the meaning of subsection 70(2) of the Act is a question of fact that would require a review of all of the facts relating to the particular situation. Where an owner of an FRA dies before the plan's Maturity Date and the property in the plan was not used to acquire an irrevocable annuity, we would generally conclude that the FRA would constitute a right or thing for purposes of the Act because the owner was entitled to withdraw all of the funds from the FRA at any time and such a withdrawal would have been included in the owner's income.

Where an interest in an FRA is considered to be a right or thing for purposes of the Act, the legal representative of the decedent and the beneficiaries would have three alternatives for reporting the decedent's interest in the FRA.

Alternative #1

The fair market value of the property held in the FRA may be included in the decedent's income tax return for the year of death along with the other income for that period. We note that the decedent would not be entitled to any offsetting deduction under subparagraph 110(1)(f)(i) of the Act.

Alternative #2

A decedent's legal representative may elect to file a separate return under subsection 70(2) of the Act. In this case, the fair market value of the property held in the IRA would be included in the decedent's separate income tax return for the "rights or things" of the decedent. Again, the decedent would not be entitled to any offsetting deduction under subparagraph 110(1)(f)(i) of the Act.

Alternative #3

The rights to amounts held in the FRA may be transferred to one or more of the beneficiaries of the decedent, within the time specified in subsection 70(3) of the Act, with the result that the beneficiaries rather than the decedent would have to report the income from the FRA as it is ultimately received. Where a beneficiary is a resident of Canada, we are of the view that the amount received by the beneficiary out of or under the FRA would be included in the recipient's income under clause 56(a)(i)(C.1) of the Act. On the other hand, where a beneficiary is not a resident of Canada, we are of the view that there is no provision in the Act that would result in the income from the FRA received by the non-resident beneficiary being taxed in Canada.

In the case where an owner dies after the plan's Maturity Date where he or she has begun to receive Periodic Distributions over the contracted period, the owner's interest in the FRA would not constitute a right or thing for purposes of the Act. In this case, the named beneficiary in the FRA would receive the remaining Periodic Distributions under the terms of the contract entered into by the decedent on the Maturity Date. Since there is no provision in the Act requiring the inclusion of the amounts held in the FRA on the decedent's death, the beneficiary, if resident in Canada, would have to include the remaining Periodic Distributions in his or her income under clause 56(1)(a)(i)(C.1) of the Act.

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