15 October 1981 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.

P.D. Fuoco Tel. (613) 593-7295

XXXX

October 15, 1981

Dear Sirs:

This is in reply to your letters of September 9 and 16, 1981 concerning a situation involving the payment of pension benefits out of a registered pension plan under the circumstances described in your letter, our understanding of which follows. We also confirm our recent telephone conversations in connection with the matters raised in your letters.

Mr. X retires from Company Y and elects to receive his pension benefits monthly for a guaranteed term of 15 years. Mr. X designates his estate to be the beneficiary of his pension benefits on his death. Mr. X dies leaving the assets of his estate to his adult children, one of whom is a resident of the United States ("U.S."), and a friend.

Assuming that the pension plan allows for payment of the remaining pension benefits, either as a lump sum or on a periodic basis, you have concluded that the payment or payments, if flowed through the estate, would retain their character as pension income in the hands of the beneficiaries. In your opinion, such amounts received by the beneficiaries would be included in their income under paragraph 56(1)(a) of the Income Tax Act ("the Act") and sections 61 and 110.2 of the Act and paragraph 60(j) of the Act would be applicable with respect to such amounts. You further maintain that the U.S. beneficiary may utilize Article VIA of the Canada-United States Income Tax Convention if the payments are made periodically, otherwise Article XI of the Convention would apply. It is your view that the payments would retain their character as pension income in the hands of the beneficiaries by virtue of the definition of "superannuation or pension benefit" in subsection 248(1) of the Act and the fact that the "estate" is merely a conduit rather than the ultimate beneficiary.

Since all the assets of the estate will be paid out of the beneficiaries in accordance with Mr. X's will, the executors of the estate have considered directing the pension plan to make the payment or payments directly to the beneficiaries. Assuming that the pension plan allows this, it is your view that this direction will not affect the character nor income tax treatment of the payments stated above.

With respect to the foregoing, you have requested our comments as to whether we agree or disagree with your conclusions. Because of the difference in income tax treatment, our comments which follow are segregated into two parts - those with respect to the Canadian -resident beneficiaries and those pertaining to the U.S.-resident beneficiary.

Canadian-resident Beneficiaries

It is our opinion that the pension benefits received by these beneficiaries either as a lump sum or on a periodic basis would retain their character when flowed through the estate and would thus be included in their income by virtue of subparagraph 56 (1) (a) (i) of the Act. We also agree that the beneficiaries could utilize paragraph 60(j) of the Act to transfer the amounts received to the extent permitted by that paragraph. Furthermore, a lump sum received by the beneficiaries in the circumstances would be qualifying income for the purpose of section 61 of the Act. We are also of the view that, within the limitations imposed, the beneficiaries could take advantage of the provisions of section 110.2 of the Act in respect of the pension benefits received by them.

A direction by the executors of the estate to have the pension benefits paid directly to the beneficiaries would not alter our opinions as set out above.

U.S.-resident Beneficiary

In our opinion, the U.S.-resident beneficiary could not rely on Article VIA of the Canada-United States Tax Convention (the Convention). Part XIII of the Act imposes a tax on certain amounts paid or credited to a non-resident person by a resident of Canada. Subsection 212(11) of that Part would operate to prevent the flow-through of the pension benefits to the U.S.-resident beneficiary. Thus, Part XIII tax would be exigible on the amounts paid (lump sum or periodic) to that beneficiary by virtue of paragraph 212(1)(c) of the Act and Article XI of the Convention would apply to restrict the rate of the tax to 15%.

However, from our various telephone conversations on the matter, you have asked us to consider whether our opinion would be any different with respect to the U.S.-resident beneficiary if, after all the assets of the estate are distributed to the beneficiaries and the executors of the estate have directed the pension plan to make periodic payments to the U.S.-resident beneficiary, the testamentary trust is wound-up. In this situation, it is our opinion that, since the estate is no longer in existence, the pension benefits paid on a periodic basis directly to the U.S.-resident beneficiary would qualify for the exempting provision of Article VIA of the Convention.

We trust our comments will be of assistance to you.

Yours truly,

for Director Non-Corporate Rulings Division Legislation Branch

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