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.
REVENUE CANADA TAXATION
SPECIALTY RULINGS AND RULINGS DIRECTORATES
ORIGINATING SECTION OFFICER DATE
Foreign and Small Business K.B. Harding Sept. 25, 1987
ISSUE
Whether the amounts received by a resident of Canada from a U.S. Individual Retirement Account (IRA), which qualified as a foreign trust, should be included in income by virtue of paragraph 56(1)(a) of the Income Tax Act or should be exempt from tax since the individual is in receipt of a capital interest in a trust.
SUBJECT, PROBLEM, POSITION, RATIONALE, COMMENTS:
Position
Prior to the addition of subsection 75(3) of the Act in 1985, which became applicable to the 1982 and subsequent taxation years, Revenue Canada took the position that the income or loss from the property in the trust or any taxable capital gains or allowable capital loss from the disposition of property or property substituted therefor by the trust in the same years will be deemed to be income or loss or a taxable capital gain or allowable capital loss of the beneficiary while he is resident in Canada. Accordingly, beneficiaries of IRA or Keogh trust plans would be taxable on the increase in the trust each year.
Since 1982, it would appear that section 94 of the Act would deem a foreign trust to be a resident of Canada and not exempt from tax in Canada on its foreign accrual property income as defined in paragraph 95(1)(b) of the Act provided the conditions of paragraph 94(1)(b) of the Act are met. However, unless subparagraph 94(1)(b)(ii) applies, where an individual becomes a resident of Canada, the trust is not taxable at the end of its year unless the individual has been a resident of Canada for a period of, or periods the aggregate of which is, more than 60 months.
Clause 94(1)(b)(ii)(A) of the Act only applies to a situation where a beneficiary of a trust has acquired an interest in a trust from another beneficiary and would not apply to a situation where an individual contributes an amount into an IRA. This view seems to be confirmed by the fact that paragraph 94(l)(b)(i) of the Act appears to be applicable to the latter situation.
Consequently IRA trusts would be taxed under section 94 of the Act on income and capital gains earned in the trust but generally only after the beneficiary has been a resident of Canada in excess of 60 months. Subsection 94(2) of the Act makes the beneficiary of the trust jointly and severally liable with the trust with respect to the obligation of the trust. Therefore if a resident of Canada cashes in his IRA, he will be responsible for the debts of the trust to the extent that the trust is not statute barred. Where however, the individual cashes in his IRA within 60 months of becoming a resident of Canada, the trust will not be subject to any tax in Canada.
When the beneficiary cashes in his IRA he will receive both income of the current year from the trust and a capital interest from the trust. Since any income of a trust is automatically converted to capital of the trust at the end of its taxation year, any amounts received out of an IRA that qualifies as a trust for Canadian taxation purposes will be exempt from tax as distributions of capital of a trust except to the extent they represent distributions of income of the current year. Where the individual converts the capital of a trust to an annuity, the annuity will be included in income by virtue of paragraph 56(l)(d) of the Act and he will be granted an exemption for the capital element by virtue of paragraph 60(a) of the Act. In either case the beneficiary of the IRA trust will be able to take the capital interest out of the IRA trust tax free in Canada. It should be noted that this treatment only applies to an IRA that does not qualify as a pension for domestic purposes.
A legal opinion was obtained which confirmed that amounts received out of an IRA, which qualified as a foreign trust, would fall within sections 94 and 104 of the Income Tax Act. However, to the extent that Article XVIII (Pensions and Annuities) of the Canada-U.S. Income Tax Convention requires a different treatment that article would prevail over domestic law.
Chief Foreign and Small Business Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
Clause 94(1)(b)(ii)(A) of the Act only applies to a situation where a beneficiary of a trust has acquired an interest in a trust from another beneficiary and would not apply to a situation where an individual contributes an amount into an IRA. This view seems to be confirmed by the fact that paragraph 94(l)(b)(i) of the Act appears to be applicable to the latter situation.
Consequently IRA trusts would be taxed under section 94 of the Act on income and capital gains earned in the trust but generally only after the beneficiary has been a resident of Canada in excess of 60 months. Subsection 94(2) of the Act makes the beneficiary of the trust jointly and severally liable with the trust with respect to the obligation of the trust. Therefore if a resident of Canada cashes in his IRA, he will be responsible for the debts of the trust to the extent that the trust is not statute barred. Where however, the individual cashes in his IRA within 60 months of becoming a resident of Canada, the trust will not be subject to any tax in Canada.
When the beneficiary cashes in his IRA he will receive both income of the current year from the trust and a capital interest from the trust. Since any income of a trust is automatically converted to capital of the trust at the end of its taxation year, any amounts received out of an IRA that qualifies as a trust for Canadian taxation purposes will be exempt from tax as distributions of capital of a trust except to the extent they represent distributions of income of the current year. Where the individual converts the capital of a trust to an annuity, the annuity will be included in income by virtue of paragraph 56(1)(d) of the Act and he will be granted an exemption for the capital element by virtue of paragraph 60(a) of the Act. In either case the beneficiary of the IRA trust will be able to take the capital interest out of the IRA trust tax free in Canada. It should be noted that this treatment only applies to an IRA that does not qualify as a pension for domestic purposes.
Chief Foreign and Small Business Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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© Sa Majesté la Reine du Chef du Canada, 1987
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