1 November 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.

Article XXIX - Canada-United States Income Tax Convention

November 1, 1985

K.B. Harding

XXXX

This is in reply to your letter of October 18, 1985, concerning paragraph 5 of Article XXIX of the Canada-United States Income Tax Convention (Convention), as amended by paragraph 4 of Article XIII of the Protocol.

You are concerned with a situation where a client, who is a United States citizen, moved to Canada in 1984 to take on a senior position in a highly specialized field. Prior to leaving the United States, the client had accumulated funds in an Individual Retirement Account (IRA). The funds remain in the IRA and continue to earn interest annually.

Your letter indicates that the client has included the undistributed income earned in the IRA in the 1984 Canadian income tax return, however, he did not include in his United States return the income earned by a Registered Retirement Savings Plan, presumably because he made an election under paragraph 5 of Article XXIX of the Convention.

Since the Convention does not provide a similar election for a Canadian resident, who accumulates income in an IRA, to defer Canadian taxation until the income is distributed out of the IRA, you are concerned that the individual will be subject to double taxation since he will be taxed in Canada when income is accrued in the IRA and again in the United States when the amounts are distributed.

Bill C-72 was passed by the House of Commons on September 25, 1985, and by the Senate on October 17, 1985, and received Royal Assent on October 29, 1985. Paragraph 1 of Clause 36 (copy attached for your convenience) amends section 75(3) of the Canadian Income Tax Act to ensure that a Canadian resident who accumulates income in an IRA will not be required to report such income in his Canadian Income Tax Return in the year the income is earned in the IRA. When the income is received from the IRA, such income will be avoided since the country of residence will provide a foreign tax credit for any tax withheld at source.

Since paragraph 2 of Clause 36 of the above Bill indicates that paragraph 1 is retroactive to the 1982 and subsequent years, your client should request that his 1984 income tax return be amended to delete the interest earned in the IRA after the Bill receives Royal Assent.

We hope that this is satisfactory for your purposes.

Yours sincerely,

Acting Director Provincial and International Relations Division