19 March 1999 External T.I. 9822685 - TAXATION OF IRAS RECEIVED OUT OF AN ESTATE

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: Taxation of IRAs received by a Canadian beneficiary from a U.S. estate

Position: 1. Subsection 56(1) of the Act does not apply. 2. However, subsection 104(13) of the Act may apply.

Reasons: 1. The Canadian beneficiary under the trust is not a designated beneficiary of the IRA (the Greg case). 2. Subsection 104(13) of the Act applies because the distribution from the non-resident trust to the beneficiary is in the same year of the income inclusion at the trust level. Also, the IRA proceeds triggered an income inclusion for U.S. tax purposes.

XXXXXXXXXX 			M. Lemire
				5-982268
March 19, 1999

Dear XXXXXXXXXX:

Re: Estate and U.S. Individual Retirement Account (IRA)

This is in reply to your letter of August 25, 1998 in which you requested our interpretation of the Canadian income tax implications with respect to amount received from a deceased’s estate, specifically from the proceeds of an IRA.

Facts

A U.S. resident dies in 1995. The deceased’s estate includes an IRA. The IRA becomes property of the estate (the “Estate”). The Estate is resident in the U.S. and is a “personal trust” as defined in subsection 248(1) of the Income Tax Act (the “Act”). The beneficiaries under the Estate include an individual resident in Canada (the “Canadian beneficiary”) who is also a U.S. citizen. The beneficiaries are not designated beneficiaries of the IRA. The Estate holds the IRA until 1997 at which time it is cashed for proceeds equal to the fair market value of the IRA at the time of the death plus earnings gained during the Estate’s holding period of the IRA. The disposition of the IRA by the Estate triggers an income inclusion for U.S. tax purposes. The Estate allocates its taxable income to its beneficiaries for U.S. tax purposes. No income tax is withheld on the amount paid from the Estate to the Canadian beneficiary. U.S. estate tax is paid by the Estate. The Canadian beneficiary receives distributions from the Estate in 1996 and 1997 which includes a portion of the proceeds of the IRA. The Canadian beneficiary is both an income and capital beneficiary of the Estate.

You are of the opinion that section 56 of the Act should not apply to include the amount received by the Canadian beneficiary in income as it was not paid directly from the IRA. You are also of the view that the distribution by the Estate to the Canadian beneficiary is a distribution of capital as the initial value of the IRA on the testator’s death is part of the Estate’s capital from a trust accounting perspective.

Since your letter appears to deal with a factual situation, we are unable to address your specific concerns in a general letter of opinion. As explained in Information Circular 70-6R3 dated December 30, 1996, your enquiry should be directed to your local Tax Services Office. We can however provide you the following general comments.

Our comments

Your letter indicates that the deceased’s estate includes an IRA. However, there are several kinds of IRAs defined under the provisions of the United States Internal Revenue Code of 1986 (the “Code”) and the Canadian taxation of these will depend on the type of IRAs held. A “foreign retirement arrangement” (“FRA”) is defined in subsection 248(1) of the Act as a plan or arrangement prescribed by section 6803 of the Income Tax Regulations (“ITR”). IRAs to which subsection 408(a), (b) or (h) of the Code applies are prescribed to be FRAs for purposes of the Act. 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.

An individual resident in Canada is generally 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 computing his or her income pursuant to 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 generally the gross amount, before U.S. withholding taxes, paid out of the FRA.

When the designated beneficiary of the FRA on death of a contributor is the contributor’s estate (rather than the individual) but the individual is a beneficiary under the estate, it is our opinion that any amount received by the individual out of the estate (specifically from the proceeds of the FRA) would generally not be required to be included in the individual’s income under clause 56(1)(a)(i)(C.1) of the Act.

However, generally speaking, pursuant to the provisions of subsection 104(24) and paragraph 104(13)(c) of the Act, all amounts paid in a taxation year to a beneficiary of a non-resident trust that is a personal trust as defined in subsection 248(1) of the Act, or to which the beneficiary was entitled in the year to enforce payment thereof, will be included in computing the beneficiary’s income for that taxation year except where such amount is proceeds of disposition of the beneficiary’s interest in the trust, or part thereof, or is a distribution of capital by the trust.

Therefore, a distribution from a non-resident trust to a beneficiary in the same taxation year the trust had an income inclusion, which is not proceeds of disposition of the beneficiary’s interest in the trust, will generally be included in computing the beneficiary’s income regardless of the source to the trust of the funds so distributed (e.g., FRA proceeds or otherwise), subject to a determination that the distribution is a “distribution of capital” by the trust. Whether a particular amount paid by the trust to a beneficiary was paid as distribution of capital would be a question of fact to be determined with reference to all the facts relevant to the particular situation, including consideration of how the disposition of the trust’s asset, as well as the distribution to the beneficiary, were treated for taxation purposes in the relevant foreign jurisdiction. Consequently, in our view, the treatment under “trust law” or the accounting treatment of a distribution by the trust of the proceeds of disposition of a trust’s asset would not be the only factor to be considered when determining the consequences arising under the Act as a result of such distribution.

In the scenario described above, it is unlikely that we would view the distribution by the Estate to the Canadian beneficiary as a distribution of capital in the present case as the disposition of the IRA triggers an income inclusion for U.S. tax purposes and the proceeds of disposition of the IRA is allocated by the Estate in the same year of the income inclusion. As stated in your letter, “The disposition of the IRA by the estate triggered an income inclusion for U.S. tax purposes;...No income tax was withheld on the amount paid from the trust to the taxpayer. For U.S. income tax purposes, the estate did not pay tax but allocated taxable income to its beneficiaries.”

Our comments are provided in accordance with paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch