6 January 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: January 6, 1987

TO- London District Office Public Affairs

FROM- Specialty Rulings Directorate K.B. Harding (613) 957-2129

ATTENTION Mr. K. Urgolo

RE: XXXX

Tier II - U.S. Railroad Retirement Pension

This is in reply to your memorandum of October 28, 1986 concerning Tier II pensions received by the above-mentioned taxpayer.

Generally speaking railroad retirement benefits paid under the Railroad Retirement Act of 1974 are divided into Tier I and Tier II benefits. Tier I benefits are the equivalent of U.S. social security benefits and are covered by paragraph 5 of Article XVIII of the Canada-United States Income Tax Convention (Convention). However, Tier II benefits are considered to be private pension plan benefits and are covered by paragraphs 1 and 2 of Article XVIII of the Convention. It should be noted that under paragraph 1, a resident of Canada is generally permitted to recover his contributions made under Tier II without tax and once the contributions are fully recovered he will be subject to tax in both Canada and the United States on such benefits but, withholding tax in the United States is limited to 15% pursuant to paragraph 2 of Article XVIII of the Convention.

XXXX

Publication 575, issued by the Internal Revenue Service titled "Pension and Annuity Income", states that the Form RRB-W-2P, issued by the Railroad Retirement Board, will indicate the amount taxable in the U.S. in Box 9.

No amount would be included in Box 9 until the contributions made by the taxpayer have been fully recovered. If sometime during the year the total Tier II benefits exceeded the Tier II contributions only the taxable portion would be included in Box 9. Once all Tier II contributions have been recovered Box 9 will indicate that the full amount of the benefits received are subject to tax.

In summary, paragraph 1 of Article XVIII of the Convention would exempt from income in Canada amounts that would be excluded from taxable income in the United States if the taxpayer were a resident thereof. Since the payors of the pension are required to include the taxable portion of the pension in Box 9 it would appear that XXXX. However, she would be required to include the amount into income pursuant to paragraph 56(1)(a) of the Act but would be permitted a deduction in Canada on amounts exempt under the Convention pursuant to paragraph 110(1)(f) of the Act.

We are enclosing a photocopy of the relevant pages of Publication 575 for your perusal and trust these comments are useful for your purposes.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch