29 September 1987 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.

DATE September 29, 1987

TO-A  Provincial and International    FROM-DE Technical Interpretations
      Relations Division                        Division
                                              C.R. Brown
                                              957-9231

ATTENTION E. Campbell
          A/Director

RE: Retirement Compensation Arrangements

It is our view that recent proposals with respect to Retirement Compensation Arrangements (Bill C-64 - First reading June 9, 1987) provides at paragraph (1) of the definition of "retirement compensation arrangement" in subsection 248(1) and in subsection 207.6(5) that the portion of funding of a foreign pension plan that relates to Canadian residents employed in Canada is deemed to be a separate Retirement Compensation Arrangement subject to withholding provisions and Part XI.3 Refundable Tax.

If a multi-national organization maintained a U.S. pension plan for its management with U.S. Trustco in the U.S.A., its Canadian subsidiaries would be required to withhold 50% of a pension contribution to U.S. Trustco made in respect of Canadian residents employed in Canada pursuant to paragraph 153(l)(p) (Bill C-64). U.S. Trustco would be required to file a return and pay Part XI.3 Refundable Tax (207.7(1) & (3) Bill C-64) on the appropriate portion of its funds and the accumulated earnings thereon (207.5(1) "refundable tax"). When distributions are made, the tax would be recoverable by U.S. Trustco and the legislation imposes the requirements of withholding from the distribution on the payor. This is our understanding of how the proposed changes to the Income Tax Act would apply.

It seems likely that U.S. Trustco which we assume does not have a permanent establishment in Canada, will recover its administrative costs and profits and receive the actuarial funding necessary to maintain the portion of the pension plan involved in the form of the contributions. In a cursory review of the provisions of the Canada U.S. Tax Convention it appeared doubtful that Part XI.3 Tax which was not specifically dealt with in this treaty could be applied to a U.S. entity not resident in Canada. The Part XI.3 Tax appears to be partially a temporary tax on the earnings of the fund and partly a tax on the funded capital. Consequently, it appeared Article II may bring this tax within the scope of the Convention. If so, business earnings of U.S. Trustco and income from property and business earned within the fund would likely be exempted be under Article VI and Article VII and possibly all taxes would be considered exempt under Article XXI. Additionally, it appears that Article XXIII would not allow any taxation by Canada were it argued that Part XI.3 Refundable Tax is a tax on capital.

We are concerned that the proposed legislation may prove ineffectual in such cases if Part XI.3 Refundable Tax cannot be collected. You may wish to consider this matter.

Original signed by Original signé par

R.E. THOMPSON

A/Director Technical Interpretations Division Legislative and Intergovernmental Affairs Directorate