10 August 1998 External T.I. 9800545 - TAXATION OF IRAS

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:

Issues related to the taxation of Individual retirement accounts (IRAs) on death with the discussion is limited to IRAs that are foreign retirement arrangements.

Position:

We provided general comments that these IRAs will be treated as rights or things.

Reasons:

Under American legislation IRAs may be structured in a number of ways such that it is difficult to provide general replies. An IRA may fit into one or more of the various plans defined in the Act, such as EBPs, RCAs or FRAs. We limited comments to those that are FRAs since these make up the greatest portion of them.

XXXXXXXXXX 		980054
W. C. Harding

Attention:XXXXXXXXXX 

August 10, 1998

Dear Sirs:

Re: Canadian Taxation of an
Individual Retirement Accounts (IRA)

This is in reply to your letter of January 7, 1998 in which you asked for our opinion on the taxation of an IRA in the circumstances outlined in your letter.

Since your letter appears to deal with a factual situation, we are unable to address your specific concerns in a general letter of opinion. Proposed transactions may only be considered when they are presented in the form of a request for an advance income tax ruling and only where the request is made in the manner set out in the Department's Information Circular 70-6R3. However, we can provide the following general comments.

A "foreign retirement arrangement" or "FRA" is defined in subsection 248(1) of the Income Tax Act (the "Act") as a plan or arrangement prescribed by regulation 6803 of the Income Tax Regulations. The Regulation then prescribes IRAs to which subsections 408(a), (b) or (h) of the United States Internal Revenue Code of 1986 applies. An IRA might also be treated as a pension plan, an employee benefit plan, a retirement compensation arrangement, a salary deferral arrangement or some other form of arrangement depending on the terms of the IRA and its use in a given situation. However, for the purposes of this reply, we have limited our discussion to IRAs that are FRAs.

Every person who receives a payment out of or under an IRA that is an FRA must include the amount of the payment in income in accordance with clause 56(1)(a)(i)(C.1) of the Act except to the extent the amount would not be subject to income taxation in the United States if the recipient were a U.S. resident.

When the owner of an IRA dies, one of the first things to determine is whether a "right or thing" within the meaning of subsection 70(2) of the Act existed at the time of death. This would be a question of fact. However, where the owner of an IRA dies before the plan's maturity and the property in the plan was not previously used to acquire an irrevocable annuity, we would generally conclude that the deceased's estate's interest in the IRA would constitute a right or thing for purposes of the Act, because the owner was entitled to withdraw all of the funds from the IRA at any time and such a withdrawal would have been included in the owner's income.

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

ALTERNATIVE #1

The fair market value of the property held in the IRA may be included in the decedent's income tax return for the year of death along with the other income for that period. 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 right to amounts held in the IRA 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 IRA as it is ultimately received or otherwise required to be included in income. 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 IRA would be included in the recipient's income under clause 56(a)(i)(C.1) of the Act at the time of distribution unless it is otherwise exempt from taxation as noted in that clause. 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 IRA received by the non-resident beneficiary being taxed in Canada.

In the case where an owner dies after the plan's maturity where he or she has begun to receive periodic distributions over the contracted period, the owner's full interest in the IRA would not constitute a right or thing for purposes of the Act. In this case, the amount of any annuity payment accrued but unpaid to the date of death must be included in the deceased's income for the year of death in accordance with subsection 70(1) of the Act. With respect to the balance of the IRA, the named beneficiaries in the IRA would receive the remaining periodic distributions under the terms of the contract entered into by the decedent and there is no provision in the Act requiring the inclusion of the amounts held in the IRA on the decedent's death. However any beneficiary resident in Canada, would have to include any amounts received in his or her income in accordance with clause 56(1)(a)(i)(C.1) of the Act with tax credits for U.S. income taxes creditable to the extent provided in the Act.

We trust these comments will be of assistance to you.

Yours truly,

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