26 November 1993 Income Tax Severed Letter 9322935 - Taxation of U.S. IRA on Death of Annuitant

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.

                 RULINGS DIRECTORATE
                CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

         Opinion

PRINCIPAL ISSUES:

         1) Whether an amount out of U.S. retirement plan
         which is exempt from taxation in U.S. and therefore
         eligible for deduction under 110(1)(f), is an
         amount subject to Part I.2 tax.

         2) Whether deemed disposition in death of amount in
         IRA and taxable in hands of deceased, estate or
         beneficiary.

REASONS FOR POSITION TAKEN:

POSITION TAKEN:

         1)  Amount is subject to Part I.2 tax

         2)  Taxable in deceased's hands in year of death
         under 70(2) or in beneficiary's hands in year of
         receipt under 70(3) and 56(1)(a)(i)(C.1)

REASONS FOR POSITION TAKEN:

         1) Apparent from previous letters on file and from
         set-up of T1 Return that Part I.2 tax exigible on
         income determined under rules set out in Divisions
         a and B of Part 1 of the Act before deductions are
         taken under Division C.

         2) An interest in property of an IRA is a "right or
         thing" and therefore subject to the rules contained
         in subsections 70(2) and (3) on the death of the
         interest-holder.

LEGAL:

FINANCE OPINION:

JURISPRUDENCE:

         Abrahamson v. MNR 
91 DTC 213

RCT PUBLICATIONS:

         1) T1 Ontario General Tax Guide—pg. 2 (Federal
         Tax Credits and You) reference to "pensions from a
         foreign country"

         2)  T1 General 1992, lines 234 through 256
         indicating Part 1.2 tax calculated on an amount
         before 110(1)(f)(i) & (iii) amounts

         3)  
IT-212R3
 (Income of deceased Persons—Rights
         or Things)

         4)  
IT-326R2
 (Returns of Deceased Persons as
         "Another Person")

         5)  1992 Guide for Preparing T1 Returns for
         Deceased Persons

HAA NUMBER:

                                           932293
XXXXXXXXXX

November 26, 1993

Dear Sirs:

Re: Taxation of U.S. Individual Retirement Account (IRA) Upon Death of Owner

This is in reply to your letter of July 27, 1993, in which you ask two questions concerning the above-noted subject. For purposes of this letter, we assume the IRA is a "foreign retirement arrangement" within the meaning of subsection 248(1) of the Income Tax Act (the "Act"). Your questions and our answers follow.

1. Is the rollover from a U.S. employer pension plan to the IRA considered income for purposes of paragraph 3(a) of the Act such that it would cause a tax liability under Part I.2, even though the rollover is deductible under subparagraph 110(1)(f)(i)?

Answer:

An amount out of a U.S. pension plan will be included in an individual's income under paragraph 6(1)(g), subparagraph 56(1)(a)(i) or paragraph 56(1)(x) of the Act depending on whether the plan is, respectively, an employee benefit plan, a pension plan arising from employee contributions only, or a retirement compensation arrangement. Where the amount is transferred to an IRA and is exempt from income taxation in the United States, the individual is entitled to a deduction under subparagraph 110(1)(f)(i) of the Act as a result of paragraph 1 of Article XVIII of the Canada-U.S. Income Tax Convention.

The tax liability under Part I.2 is calculated in part by reference to "the individual's income under Part I for the year" (subparagraph 180.2(1)(b)(i) of the Act). "Income" used in this sense means net income and is the income determined in Divisions A and B of Part I of the Act. Therefore, for purposes of the Part I.2 tax, the amount rolled into the IRA will be included in income but there will be no reduction for the corresponding deduction under paragraph 110(1)(f)(i) of the Act.

2. Under U.S. rules there is no tax on the fair market value in the IRA at death. Rather a distribution from the IRA is treated as "income in respect of the decedent" and taxed to the beneficiary as received. Accordingly, upon the death of the owner, is the fair market value of the IRA brought into income for the year of death with a corresponding deduction under subparagraph 110(1)(f)(i) with Canadian tax being payable as the beneficiary spouse receives distributions? Would the answer be any different if the beneficiary were a child of the owner rather than a spouse?

Answer:

An interest in an IRA is considered a "right or thing" within the meaning of subsection 70(2) of the Act and in the year of death there are three alternative tax treatments available as follows:

     1) the total value may be included in the deceased's
        income in the year of death and, if exempt from
        income tax in the United States, a corresponding
        deduction taken under subparagraph 110(1)(f)(i) of
        the Act, 

     2) the deceased's legal representative may make the
        election under subsection 70(2) of the Act and
        file a separate return, including the value of the
        IRA in the income reported on the separate return
        and, if exempt from income tax in the United
        States, claiming a corresponding deduction under
        subparagraph 110(1)(f)(i) of the Act, or

     3) amounts received out of the IRA may be taxed in
        the recipient beneficiary's hands under clause
        56(1)(a)(i)(c.1) of the Act in the year of receipt
        if ownership of the IRA is transferred to the
        beneficiary (whether the spouse or child) in the
        time specified in subsection 70(3) of the Act.

Where either alternative 1 or 2 is chosen, amounts later received by the beneficiary (whether the spouse or child) will be taxable in the year of receipt under clause 56(1)(a)(i)(c.1) of the Act.

Please note that the foregoing comments are an expression of opinion only and, consequently, are not binding on the Department. We trust, however, that they are helpful.

Yours truly,

for Director Financial Industries Division Rulings Directorate