13 December 1983 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.

XXXX

W.E. Baumister (613)19S-0051

Attention: Manager, Income Tax Services

December 13, 1983

Dear Sirs:

Re: Transfer of an IRA Account

We have for reply your letter of September 6, 1983.

XXXX While resident in the United States, he set up and made payments to an "Individual Retirement Account", one of the three types of the U.S. "Individual Retirement Arrangement (IRA)" savings programs. Your client is seeking information on the possibility and means of transferring this account from the U.S. to Canada and on bow to deal with it under the provisions of the Canadian Income Tax Act.

We do not believe that the Individual Retirement account of your client could be transferred to Canada, since the U.S. Internal Revenue Code requires that the Account must be a trust created or organized in the United States and must be maintained at all times as a domestic trust in the U.S. It must be created by a document and must require, among other things, that the trustee or custodian must be a (U.S.) bank, federally insured credit anion, savings and loan association, or a person who is eligible to act as trustee or custodian (under the provisions of the Internal Revenue Code).

This being so, we must restrict our comments to the application of the provisions of the Canadian Income Tax Act to distributions received by a Canadian resident from a U.S. Individual Retirement Account. For purposes of our reply, we shall assume that your client has not made or will not make any further voluntary payments to the Account after he became a resident of Canada.

As we understand, your client has a choice regarding distributions from his Account

(a) Between now and before the end of the year in which he reaches the age of 70} years, your client may make withdrawals from his Account in any amount up to the balance in the Account, but his entire interest in the Account must be actually distributed to him by the end of that year. Please note, that any withdrawal from the Account before your client reaches the age of 591 years is a "Premature Distribution" and subject to a penalty tax under the Internal Revenue Code 'equal to 10% of the amount withdrawn;

(b) In lieu of distributing the entire balance in the Account to your client by the end of the year referred to in (a), his interest may be distributed commencing not later than the year in which he reaches the age of 70} years over any of the following periods (or any combination thereof):

(i) his life,

(ii) his life and that of his spouse,

  (iii)  a fixed period not extending beyond his life 
         expectancy, or

   (iv)  a fixed period not extending beyond the joint 
         life and last survivor expectancy of his and 
         his spouse.

The following provisions of the Canadian Income Tax Act must be considered in the situation outlined above.

1. Your client's interest. in the "Individual Retirement Account" will be regarded on a capital interest in an "inter vivos" trust not resident in Canada.

2. Section 94 of the Act will not apply to the trust or to your client who is the beneficiary thereof, because the trust has never acquired property directly or indirectly from a Canadian resident beneficiary of the trust.

3. The application of section 107, subsection 48(3) and 75(2) of the Act can best be illustrated by the following hypothetical example:

          Contributions of            
             your client                      Value at
           to his Account     Earnings      end of Year
           ______________     _________     ____________

     1980     US  $2,000       US  $100        
     1981     US  $2,000       US  $200        
     1982     US  $2,000       US  $300     US  $6,600

Your client becomes resident in Canada on January 1, 1983.

    1983        --             US  $400     US  $7,000
    1984        --             US  $500     US  $7,500

Your client withdraws the entire balance in the Account on January 1, 1985.

On becoming resident in Canada on January 1, 1983, your client is deemed, by virtue of subsection 48(3) of the Act, to have acquired his capital interest in the trust at a cost equal to the fair market value of the interest on that date, i.e., $6,600. Please note, that subsection 107(1.1) of the Act which normally deems the cost of a capital interest to be NIL does not apply in this situation by virtue of the second exception listed in that subsection, i.e., any interest in the trust was issued to your client for consideration paid by him that was equal to the fair market value of that interest at the time of issuance.

By virtue of subsection 75(2) of the Act, the income or loss from the property in the trust in 1983 and 1984 or any taxable capital gains or allowable capital loss from the disposition of the property or property substituted therefor by the trust in the same years will be deemed to be income or a loss or a taxable capital gain or allowable capital loss of your client for 1983 and 1984 while he is resident in Canada.

When your client withdraws the entire balance in his Account on January 1, 1985, in a lump sum, the cost amount of the assets in the Account is $7,500. Since the disposition of your client's capital interest occurs on the distribution of assets in satisfaction of that interest, the provisions of subsection 107(2) of the Act apply.

(i)  Under paragraph 107 (2) (a), the trust disposes of
     the property at its "cost amount" (i.e. Adjusted 
     cost base). The "cost amount" to the trust of
     the trust property so distributed will be determined
     as if the trust were a resident of Canada                       $7,500

(ii) Under paragraph 107 (2)(b), your client acquires the property at a cost, which is

   (A)  the "cost amount" of the property to the trust $         7,500 
         plus

  (B) the Adjusted cost base of your client's capital 
        interest as at January 1, 1983                                    $6,600

       less
      the "cost amount of his capital interest"
      (as defined in paragraph 108(1)(d))                         $(7,500)
                                                                  _______
       Excess of (A) over (B)                                                  NIL

                                                                             ______  
       Cost of acquisition of property to your client                        $7,500
                                                                             ______

(iii) Under paragraph 107 (2)(c), your client disposes
      of his capital interest for proceeds equal to (ii)
     above                                                                   $7,500
                                                                             ______

For the purpose of computing your client's taxable capital gain (if any) paragraph 107(1)(a) determines the Adjusted cost base of his interest to be the greater of the: Adjusted cost base of the interest (i.e. $6,600) and the "cost amount of his capital interest" (as calculated in paragraph 108(1)(d)) (i.e. $7,500).

Since the proceeds are $7,500 (see (iii) above) and the cost amount is $7,500, there is no capital gain.

Where the balance in the Account is to be distributed over one of the periods mentioned in (b) above, rather than in a lump sum, we take the position that everything received by your client from the trust will be considered to be income within paragraph 12(1)(m) of the Act unless evidence is submitted that the amounts have a source in the capital of the trust. Where it can be shown that an amount received in a particular year by your client is a distribution of trust income of one or more prior years, that will be taken to be a distribution of capital.

Your client indicated that he might be interested in depositing the funds received from his Account into an RRSP. This he can do only within the limits imposed by the provisions of subsection 146(5) of the Act, which deals with the deductibility of premiums paid by a taxpayer in a year into an RRSP under which he is the annuitant. There is no provision in the Income Tax Act which would permit your client to pay an unlimited amount of the funds received from his Account into an RRSP without adverse tax consequences.

You informed us by telephone, that you were aware of the application of sections 114, 115, 2(1) and 126 of the Canadian Income Tax Act as well as Article XI of the Canada-US Tax Convention to your client, so that no comments of ours will be required.

Yours sincerely,

Original Signed by J.J. SANDERS Original Signé par for Director Non Corporate Rulings Division