3 June 2022 External T.I. 2021-0904831E5 - U.S. Roth IRA

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.

Principal Issues: (1) Where the surviving spouse or common-law partner (the “Spouse”) is designated as beneficiary of the deceased’s Roth IRA, does subsection 70(5) applies to deem a disposition of the property held in the deceased’s Roth IRA at fair market value as at the date of death, subject to the rollover provision in subsection 70(6)? (2) Do the tax consequences differ if the deceased taxpayer filed an election under Article XVIII(7) of the Treaty? (3) Is the Spouse required to file an election under Article XVIII(7) of the Treaty after a spousal contribution as a consequence of death? (4) Does Article XVIII(1) of the Treaty apply to exempt withdrawals from the Spouse’s Roth IRA from taxation in Canada if they would be excluded from taxable income in the U.S, were the recipient a resident there?

Position: (1) Likely. (2) Yes. (3) Recommended. (4) Generally yes.

Reasons: (1) Question of fact and law. However, subsection 70(6) would likely apply in this case. (2) If a valid election under Article XVIII(7) was filed, the accrued gain would be added to the capital of the Roth IRA with no immediate consequences to the deceased taxpayer. (3) The Spouse should file an election under Article XVIII(7) of the Treaty to defer Canadian income tax on income accrued in his or her Roth IRA after a spousal contribution. (4) Question of fact.

XXXXXXXXXX 2021-090483
K. Podor

June 3, 2022

Dear XXXXXXXXXX:

Re: United States Roth IRA

We are writing in response to your inquiry dated August 4, 2021 in which you provided the following hypothetical facts:

• A taxpayer contributes to a Roth IRA custodial account while he is a resident of the United States.
• The taxpayer (the “Deceased”) dies in 2021. At that time, he is a resident of Canada.
• The surviving spouse (the “Spouse”) is a resident of Canada and is named the sole beneficiary of the Roth IRA.
• As beneficiary, the Spouse transfers the property in the Deceased’s Roth IRA to her own Roth IRA or designates herself as the account holder of the Deceased’s Roth IRA.
• To-date, no subsequent distributions have been made from the Spouse’s Roth IRA.

You asked us to comment on the following:

1. Does subsection 70(5) of the Act (footnote 1) apply to deem a disposition of the property held in the Deceased’s Roth IRA (the “Property”) at fair market value as at the date of death, subject to the rollover in subsection 70(6)?
2. What are the tax consequences if the Deceased had filed a valid election pursuant to paragraph 7 of Article XVIII of the Canada-United States Income Tax Convention (the “Treaty”)?
3. Is the Spouse required to file an election pursuant to paragraph 7 of Article XVIII of the Treaty with respect to the Spouse’s Roth IRA after the transfer of the Property?
4. What is the Canadian income tax treatment of subsequent distributions made from the Spouse’s Roth IRA?

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The CRA’s general views regarding the income tax treatment of Roth IRAs are set out in Income Tax Folio S5-F3-C1, Taxation of a Roth IRA (the “Folio”). As noted in paragraph 1.5 of the Folio, the CRA understands that typically a Roth IRA custodial account is a savings or investment account (other than a trust account) and considers the individual who holds the interest in the custodial account to own the assets held in the account by the custodian. Paragraph 1.7 of the Folio further notes that one must look to the nature of the income and gains derived from the specific assets held in the account to determine the appropriate Canadian income tax treatment.

The CRA positions discussed below apply equally where there is a spousal contribution by way of a rollover of the Property held in the deceased’s Roth IRA to the Spouse’s own Roth IRA or where the Spouse is the sole beneficiary and becomes the successor owner of the deceased’s Roth IRA, in which case the contributions made by the Deceased are also considered as spousal contributions.

Application of subsections 70(5) and (6)

In very general terms, subsection 70(5) deems a deceased taxpayer to have disposed of each capital property that was owned by the taxpayer immediately before death for proceeds of disposition equal to the property’s fair market value at that time. Subsection 70(6) provides rules for a tax-deferred rollover of the taxpayer’s capital property on death to the taxpayer’s spouse or common-law partner (“CLP”), or to a qualifying spousal or CLP trust, where certain conditions are met.

Whether the conditions in subsection 70(6) would be satisfied in a particular situation is a question of mixed fact and law that can only be answered after a review of all the facts and relevant documents, including the intention and the conduct of the taxpayer in respect of the Property. For purposes of this response, we have assumed that the Property would qualify as capital property of the Deceased. We have also assumed that the Property was transferred or distributed to the Spouse as a consequence of the death of the Deceased for purposes of paragraph 70(6)(a).

Assuming that the conditions in subsection 70(6) are met and apply to the Property bequeathed to the Spouse, subparagraph 70(6)(d)(ii) would deem there to have been a disposition of the Property, the proceeds of disposition of which would be equal to the adjusted cost base of the Property, other than depreciable property, to the Deceased immediately before the Deceased’s death.

If the Deceased had previously filed a valid election under paragraph 7 of Article XVIII of the Treaty, taxation in Canada on any gains arising from the deemed disposition of the Property pursuant to subsection 70(5) (assuming subsection 70(6) did not apply) would continue to be deferred, to the extent that such gains are considered income accruing in the Roth IRA, provided no distribution is made from the plan. The accrued gains would be added to the capital of the Roth IRA custodial account without triggering any liability for Part I tax.

The CRA’s view is that a spousal contribution to a Roth IRA is not, in and of itself, a “Canadian contribution” for purposes of Article XVIII of the Treaty. This is the case regardless of whether the Spouse is redesignated as the account-holder or the Deceased’s Roth IRA or the property in the Spouse’s Roth IRA is transferred to an existing Roth IRA of the Spouse. As a result, the Spouse’s Roth IRA will qualify as a “pension” for purposes of subparagraph 3(b) of Article XVIII of the Treaty in either case, provided the Spouse does not otherwise make any Canadian contribution.

Procedures for filing an election

Any individual resident in Canada who wishes to defer taxation in Canada on income accrued in a Roth IRA should file an election pursuant to paragraph 7 of Article XVIII of the Treaty for each Roth IRA of the individual. In addition to providing the information requested in paragraphs 1.15 – 1.21 of the Folio, the requester should identify that a spousal contribution was made to his or her own Roth IRA and provide the date and the amount (in Canadian dollars) of the property transferred as a consequence of the death of the individual’s spouse. Even if the Deceased and/or the Spouse, as the case may be, had already filed an election under paragraph 7 of Article XVIII of the Treaty for a Roth IRA, we recommend filing a new election after any spousal contribution.

Distributions

As noted in paragraph 1.11 of the Folio, a distribution from a Roth IRA to an individual resident in Canada is not taxable in Canada to the extent that the payment would not be taxable in the U.S. if the individual were a resident of the U.S and the Roth IRA qualifies as a pension. It is a question of fact whether a particular payment received by an individual would be exempt from tax if the individual were a resident of the U.S. The effect of paragraphs 1 and 7 of Article XVIII of the Treaty is that, in most cases, no portion of the Roth IRA will be subject to taxation in Canada.

We trust these comments will be of assistance.

Yours very truly,

Helen Ferrigan
A/Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise noted, all references are to the Income Tax Act.