7 November 1991 Income Tax Severed Letter - Foreign Retirement Arrangements

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.

Dear Madam:

This is in reply to your letter of April 19, 1991 concerning proposed legislation relating to foreign retirement arrangements.

We apologize for the delay in replying.

Where a person resident in Canada is entitled to receive an amount out of a U.S. pension plan and directs that the amount be transferred directly from the plan to an individual retirement account (IRA), the amount is required to be included in computing the person's income for the year of the transfer. However, if the transfer itself would not have resulted in the amount being taxed in the U.S. had the person been resident there at the time of the transfer, the exemption under Article XVIII of the Canada-U.S. Income Tax Convention (1980) will apply with the result that the Canadian resident will be entitled to a deduction under subparagraph 110(1)(f)(i) of the Income Tax Act (the "Act").

As indicated on page 77 of the Explanatory Notes issued by the Department of Finance in May 1991, it is intended that proposed clause 56(1)(a)(i)(C.1) of the Act will apply to amounts received out of an IRA after July 13, 1990. Proposed clause 56(1)(a)(i)(C.1) will form part of subparagraph 56(1)(a)(i) of the Act, which subparagraph reads "a superannuation or pension benefit including ...". Thus, if the legislation is enacted as proposed, an amount received out of an IRA after July 13, 1990 will represent a "superannuation or pension benefit" taxable under subparagraph 56(1)(a)(i) of the Act regardless of the original source of the funds, except to the extent that the amount would not, if the recipient were resident in the U.S., be subject to tax in the U.S.

Rollover Available Under Subparagraph 60(j)(i)

It is the Department's practice to treat amounts received out of an IRA as income from a pension plan where those amounts relate to funds rolled into the IRA from a pension plan. As a consequence of this practice and proposed clause 56(1)(a)(i)(C.1), an individual who receives a lump-sum amount (i.e., an amount that is not part of a series of payments) from an IRA into which funds from a foreign pension plan were transferred may be entitled under subparagraph 60(j)(i) of the Act to roll over all or a portion of the lump-sum amount into a registered retirement savings plan ("RRSP") or registered pension plan ("RPP"). If the legislation is enacted as proposed, this rollover will be available to the extent that

• (a) the lump-sum amount exceeds any portion thereof deducted under subparagraph 110(1)(f)(i) of the Act, and
• (b) the excess described in (a) above relates to the transferred pension plan funds and those funds are attributable to services rendered by the individual or his spouse, or former spouse, in a period throughout which the person rendering the services was not resident in Canada.

Where a lump-sum amount attributable to pension plan funds was received from an IRA before July 14, 1990, the above rollover was generally available except to the extent that the lump-sum amount was required to be included in income under either paragraph 56(1)(x) or (z) of the Act as income from a retirement compensation arrangement. Furthermore, if the lump-sum amount was payable to the individual before June 7, 1990, the above rollover was generally available even where the services were not performed by the individual or his spouse, or former spouse.

Additional Rollover Available Under Proposed Subparagraph 60(j)(ii)

In addition to the rollover available under paragraph 60(j)(i) of the Act as discussed above, a person who receives a lump-sum amount from an IRA after July 13, 1990 may be entitled to rollover all or a portion of the lump-sum amount into an RRSP or RPP under subparagraph 60(j)(ii) of the Act, by virtue of proposed section 60.01 of the Act and the proposed amendment to subparagraph 60(j)(ii). If the legislation is enacted or amended as proposed, the amount that will be eligible for this rollover will be equal to the amount by which

• (c) the excess of the lump-sum amount over any portion thereof that was rolled over under subparagraph 60(j)(i) of the Act,

exceeds

• (d) the amount by which the excess described in (c) above exceeds the portion thereof that may reasonably be considered to derive from contributions to the IRA by a person other than the recipient or his spouse or former spouse.

We trust that our comments are of assistance.