28 January 1986 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.

PROVINCIAL AND INTERNATIONAL RELATIONS DIVISION DIVISION DES RELATIONS PROVINCIALES ET INTERNATIONALES

January 28, 1986

Non-Corporate Rulings Directorate Revenue Canada, Taxation 875 Heron Road Ottawa, Ontario KIA 0L8

Attention: Mr. Rick Primeau

Dear Sir

We have recently had occasion to consider the appropriate withholding tax rates on certain types of payments which may be made to residents of the United States. The principal relevant legislation appears to be paragraphs 212(1)(h), (1) and (m) of the Income Tax Act, and Article XVIII of the Canada U.S. Income Tax Convention (1980). We would appreciate your opinion on the correctness of the following:

                                                                    Withholding 
Payment Type                                                        Tax Rate

1. Lump sum from registered pension plan (RPP)                          25% 
2. Lump sum from deferred profit sharing plan (DPSP)                    25% 
3. Lump sum from registered retirement savings plan (RRSP)              25% 
4. Periodic pension payment from RPP                                    15%
5. Periodic payment directly from DPSP (as allowed by 147(2)(b)(v))     25% 
6. Payments of an annuity acquired by direct transfer of funds from 
DPSP or RRSP (the transfer itself being free of withholding tax)        15% 
7. Payments from a registered retirement income fund (RRIF)             15%

Further, whether funds from a DPSP are transferred directly to a person licensed to issue annuities or transferred first to an RRSP and then use to acquire an annuity, the resulting periodic annuity payments would in either case have tax properly withheld at 15%. The only substantive difference would be that the term of the annuity would differ.

The reason that periodic payments made directly from a DPSP to an individual resident in the U.S. does not enjoy reduced withholding is that a DPSP appears not to be a pension or retirement plan. Consequently, it does not qualify for reduced withholding under paragraph 3 of Article XVIII. However, if the proceeds of a DPSP are used to acquire an annuity meeting the conditions of subparagraph 147(2)(k)(vi), the annuity so acquired meets the conditions of paragraph 4 of Article XVIII. Since all the annuity payments would be taxable if received by a Canadian resident, the entire amount of such annuity payments would be subject to 15% withholding tax.

We note that the discussion above focuses on withholding rates. The recipients have the option of electing under section 217 to be taxed under Part I, but this does not, of course, affect the withholding obligations of the paying party.

We would appreciate our opinion on this matter. Should you have any questions, please contact the writer.

Yours truly,