7 November 2002 External T.I. 2002-0154285 - Taxation of Inherited 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: On the death of the contributor, a U.S. IRA is received by a Canadian resident as an inheritance - is withdrawal from the IRA taxable?

Position:     		Likely 

Reasons: If the payment is from an IRA that qualifies as an FRA, it is included in income under clause 56(1)(a)(i)(C.1) of the Income Tax Act. There is no relieving provision in the Canada-U.S. Income Tax Convention (1980).

XXXXXXXXXX 2002-015428
T. Cook
November 7, 2002

Dear XXXXXXXXXX:

Re: Individual Retirement Account ("IRA") Withdrawal

We are writing in reply to your letter of July 12, 2002, in which you requested our views on the taxability of withdrawals from an IRA. Our understanding of the situation is as follows. Your client is a Canadian citizen and resident of Canada. Your client's sister has died and your client has inherited her IRA. Your client is in the process of withdrawing the funds from the IRA and transferring them to Canada. In particular, you wish to know whether the amount paid out from the IRA will be taxable under the Income Tax Act (the "Act") in the hands of your client.

Our Comments

Your letter describes the situation of a particular taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in respect of a proposed transaction other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

Paragraph 69(1)(c) of the Act provides that "except as expressly otherwise provided in the Act", where a taxpayer acquires property by way of bequest or inheritance, the taxpayer is deemed to acquire the property at its fair market value. As a result, in most instances when a taxpayer inherits property, no tax is payable on the acquisition. Special rules, however, may apply in the case of an IRA.

Under subparagraph 56(1)(a)(i) of the Act, a taxpayer is required to include in his or her income any amount received on account of or in satisfaction of a superannuation or pension benefit. The taxation of superannuation and pension benefits is discussed generally in Interpretation Bulletin IT-499R, Superannuation or Pension Benefits, which can be accessed from our website at www.ccra-adrc.gc.ca. More particularly, pursuant to clause 56(1)(a)(i)(C.1) of the Act a taxpayer must include in income any amount he or she received out of, or under, a foreign retirement arrangement ("FRA"). This applies to all amounts received out of, or under, an FRA, whether lump sum or periodic, and includes any amounts received as a named beneficiary. The amount to be included in the recipient's income is the gross amount paid out of the FRA, before any withholding or penalty taxes.

IRAs established under subsections 408(a), (b) or (h) of the United States Internal Revenue Code of 1986 are prescribed to be FRAs by subsection 248(1) of the Act and section 6803 of the Income Tax Regulations. We note, however, that not all IRAs (for example, Roth IRAs) qualify as FRAs. If the IRA involved is a Roth IRA then a different set of considerations may apply. For purposes of this discussion it is assumed that the IRA involved qualifies as an FRA.

Clause 56(1)(a)(i)(C.1) also sets out one exception to the income inclusion. An amount need not be included in income where the amount would have been received free of tax in the country governing the FRA if the person receiving the amount had been resident in that other country. That is, if an amount received from a qualifying IRA would not have been included in income for U.S. purposes had it been received by a U.S. resident, then it is similarly excluded from income for Canadian purposes. Our understanding is that a payment out of an IRA that qualifies as an FRA would normally be included in income in the United States and consequently, the amount of the receipt by a Canadian taxpayer is included in income pursuant to clause 56(1)(a)(i)(C.1).

We note that nothing in the Canada-U.S. Income Tax Convention (1980) (the "Tax Convention") precludes this result. Article XVIII of the Tax Convention governs the taxation of pension payments and paragraph 1 of the Article provides an income exclusion similar to the one discussed above. The paragraph provides, in part, that a pension arising in the United States and paid to a resident of Canada may be taxed in Canada, but only to the extent that the amounts paid would have been included in taxable income in the United States had the recipient been a resident of the United States.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch