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: Whether an individual is required to file an election under paragraph 7 of Article XVIII of the Canada-U.S. Tax Convention to defer Canadian taxation with respect to undistributed income accrued in a traditional IRA, as is the case for a Roth IRA?
Position: No.
Reasons: There is no need for an individual to make the election because the Act already provides for a deferral of taxation with respect to income accrued in a traditional IRA until it is paid out of the plan.
XXXXXXXXXX
2011-040407
D. Wurtele
June 25, 2012
Dear XXXXXXXXXX,
Re: Election to defer income in U.S. traditional IRA
This is in response to your email April 24, 2011, in which you asked whether an individual is required to file an election under the Canada-U.S. Tax Convention (the "Convention") to defer taxation with respect to undistributed income accrued in a United States ("U.S.") traditional individual retirement account ("IRA").
Our comments
Under paragraph 7 of Article XVIII of the Convention, a Canadian resident who is a beneficiary of a tax-exempt plan in the U.S. that qualifies as a pension for purposes of the Convention may elect to defer taxation in Canada with respect to income accrued in the plan, until such time as and to the extent that a distribution is made from the plan.
The election is of benefit to an individual where the accrued income would be taxable to the individual under the Income Tax Act (the "Act") on a current basis, such as for Roth IRAs. Income Tax Technical News No. 43 Taxation of Roth IRAs outlines the procedures for making the election for Roth IRAs and is available on our website at www.cra-arc.gc.ca.
Where the accrued income in the plan is not taxable under the Act until it is paid out of the plan, there is no benefit to an individual in making the election. In this regard, there would be no need to make the election for a traditional IRA because the Act already provides for a deferral of taxation for these plans. A traditional IRA is characterized as a foreign retirement arrangement for Canadian tax purposes. Under clause 56(1)(a)(i)(C.1) of the Act, an individual is required to include amounts under a foreign retirement arrangement in income only when the amounts are paid out of the plan.
We trust that these comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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