17 August 1989 External T.I. 80290 F - IRA Pension Tranfers

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.

Subject: 19(1)

This is in reply to your memorandum of April 26, 1989 with respect to the above-noted taxpayer. We apologize for the delay in our response.

The subject matter in this case is the taxation of resident taxpayers on payments received from United States ("U.S.A.") Individual Retirements Accounts ("IRAs") where amounts were previously transferred to the IRA from a pension plan. The taxpayer was taxed on such receipts in 1986 on the basis that they were pension benefits as defined under paragraph 56(1)(a) of the Income Tax Act (the "Act") in accordance with our "General Position" as set out in Assessing Directive ASG-89-6.

In appealing the assessment, the taxpayer's representative has provided a number of arguments against our general position. You have asked us to review these and provide our comments.

As you may be aware. our general position was developed on he premise that a transfer of a pension between plans should not change the nature of the pension payments.  21(1)(a)  Nevertheless, in the interim we ask that our present position be maintained as a matter of policy where a taxpayer cannot otherwise justify an alternative course of action.

21(1)(a)  To this end, we note that the taxpayer was resident in Canada in 1975 at the time he made the transfer of his (employer's) pension funds to an IRA (Please refer to the 19(1) letter of January 6, 1988 and attachments thereto) and it is accordingly arguable that, subject to the possible application of paragraph 254(a) of the Act (discussed below), paragraph 56(1)(a) of the Act should have had application in 1975 at the time of transfer. In that case, a re-opening of the year would have to be done in accordance with Department Policy.

As an alternative we are of the opinion that a modified basis of assessment to that previously proposed may also be put forward which does not rely upon the concept of a flow of pension benefits through a "retirement plan".

From our examination of the above-noted documents it is now apparent that the pension plan required the taxpayer to roll the amounts to an IRA. On the basis of this fact it is our opinion that paragraph 254(a) of the Act may be applicable. That is, a document was issued or a contract was entered into (the IRA) which purported to create, to establish to extinguish or to be in substitution for the taxpayer's rights under a pension plan and those rights are rights provided for by the pension plan in so far as the pension required the payments to be transferred to an IRA. Accordingly, the taxpayer would be deemed not to have received any amount out of the pension plan at the time of the transfer, 1975, and subsequent payments out of the IRA would be taxable as payments out of or under the pension plan.

In our opinion, there is no conflict between the provisions of the Canada-U.S. Tax Convention (the "Convention") and paragraph 254(a) of the Act. The Act deems the amounts to be payments out of a pension, and the convention provides that these are subject to taxation in the recipient's country of residence. Paragraph 3 of Article XVIII in our opinion will not act to exclude any payments deemed by paragraph 254(a) of the Act to be pension payments.

We are aware from the documentation noted above that the taxpayer received the pension payment prior to its rollover to the IRA. We, however, are of the opinion that paragraph 254(a) of the Act does not require a direct transfer in order for it to apply and Legal Services has verbally confirmed this.

In our discussions of this case (Lalonde/Harding) you asked for our comments on the old Canada-U.S. convention as it might apply to this situation. The particular provisions would be Article VIA of the Convention and paragraph 7 of the Convention Protocol. These provided that "pensions" were taxable only in the country of a recipient's residence and that "pensions" meant "periodic payments made in consideration for services rendered or by way of compensation for injuries received".

The old convention limited taxation of periodic pension payments, it did not limit the taxation of any other payments out of a "pension" plan nor did it expand upon the meaning of pensions to identify specific sources of the periodic payments as does the present Convention. In general, it appears that the term pension was considered to have its ordinary meaning. It would have had no application in your case if the funds had been received while it was in force.

for DirectorFinancial Industries DivisionRulings Directorate