28 March 1985 Income Tax Severed Letter

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.

March 28, 1985

E.E. Campbell

XXXX

Re: Canada-United States Income Tax Convention

XXXX

We have your letter of March 7, 1985, regarding the interpretation of Article XVIII of the above-noted tax convention.

Section 212(1)(h) of the Income Tax Act contemplates a withholding of 25 per cent on any payments of superannuation or pension benefits. A superannuation or pension benefit is defined in the Act to include any amount received out of or under a superannuation pension fund or plan. Under Canadian law there would be no differentiation between a periodic payment and a lump sum payment in so far as the applicability of tax is concerned. In addition, no reference is made as to whom the amounts are paid, it is sufficient that they be paid out of such a plan to a non-resident.

Article XVIII of the Convention sets out the rules applying to payments from pension plans. If a person is the beneficial owner of a periodic pension payment the tax is reduced to 15 per cent of the gross amount of the payment. It should be noted that contrary to what your counsel suggests it is not a question that they are made directly to a beneficiary but rather that they are made, and the beneficial owner is a resident of the other country. A lump sum payment is subject to the 25 per cent rate. Reciprocal transfers are lump sum payments out of a pension plan regardless to whom they are made.

With respect to Article XXI it should be noted that contrary to what your counsel says the treaty does not exempt income derived by pension funds entirely. There is an exemption for interest and dividends, which is a broadening of the exemption in this area since previously this had not been the case. That does not affect the transfer of funds from the plan in Canada to the United States.

Under the old treaty there was no withholding on periodic pension payments. The Convention did not refer to lump sum payments and thus the domestic rate would have applied, except that the Convention indicated that no rate would be applied above 15 per cent. The intention of the new Convention is to allow either State to withhold on periodic payments with the other State granting a tax credit against its own taxes. You will appreciate that payments going into the plan are the subject of tax relief and if the transfer is to be made without tax, then there is an inequity to the system under which the original relief was granted. As noted in the previous correspondence, the provisions of the old treaty can apply until the end of 1985 for individuals and since this amount would be in respect of an individual the 15 per cent rate could apply to the end of 1985.

We regret that our reply could not have been more favourable.

Yours sincerely,

Director Provincial and International Relations Division

EEC/PP/jb