23 October 1985 Income Tax Severed Letter A1579 - [851023]

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.

Discussion Notes - A1579

W. Hood October 23, 1985

Facts

1. The taxpayer is a resident of Canada.

2. The taxpayer retired April 30, 1985 from employment with a Canadian corporation (Canco) which is a wholly owned subsidiary of a United States Corporation (USCo).

3. The taxpayer is entitled to the benefits from; - two defined contribution retirement plans maintained by USCo. (USCo Plans), and - a Thrift Plan maintained by USCo.

4. Approximately 50% of the benefits from the USCo Plans relate to service during periods when the taxpayer was resident outside of Canada.

5. The taxpayer may transfer these benefit entitlements to recognized U.S. deferral arrangements. The USCo Plans benefits would be rolled or transferred (trustee to trustee transfer) to an "IRA" (a US recognized individual retirement account) or to a "Keogh" ( a US recognized retirement arrangement for self-employed individuals). The Thrift Plan entitlements would be transferred to an IRA or to a Keogh and perhaps subsequently to an IRA.

6. The taxpayer's representative is of the view that the above benefits would not be subject to income tax in Canada until they are received by the taxpayer through payouts from an IRA or Keogh.

7. The taxpayer's representative submits that Article XVIII(1) of the Canada-U.S. Income Tax Convention (1980) would exclude from taxation in Canada the benefits from the USCo Plans that are rolled or transferred to an IRA or Keogh.

8. The representative relies on his interpretation of constructive receipt, and on the comments in paragraphs 10 and 32 of IT-502 to support his position that the taxation in Canada of the Thrift Plan entitlement would be deferred until there is a payout from the Keogh, (or an IRA if the Keogh benefit is subsequently transferred to an IRA).

Proposed Response

9. USCo Plans (a) In our view the exclusion provision in Article XVIII(1) of the Treaty is intended to ensure that a return of pension capital is not taxed as pension income and is not extended to exclude domestic deductions such as a roll of pension income to an IRA. It seems to us that an IRA contribution is a deferral rather than an exclusion from taxable income. However, Provincial and International Relations Division has raised the issue with the US authorities. We are advised that a reply cannot be expected before January 1986.

(b) IRA and Keogh Plans have no tax deferral status in Canada and are merely considered to be inter vivos trusts. Accordingly, we will advise that the USCo Plans pension benefits will be taxable in Canada by the resident taxpayer at the earlier of the time benefits are received or the taxpayer directs the plan trustee to transfer the benefits to a US deferral plan, pursuant to 56(1)(a)(i).

(c) We can advise that 6(1)(g)(iii) benefits may be rolled to an RRSP pursuant to 60(j).

10. Thrift Plan

Whereas this is described as an employee benefit plan, we are of the view that either a payout of benefits or transfer of entitlements to a US deferral plan represents a 6(1)(g) income amount. We do not agree with the representative's conclusions with respect to constructive receipt as advanced in paragraphs 41 and 42 of his submission. The taxpayer's ability to direct the Thrift Plan trustee to transfer the funds, in our view, represents constructive receipt. Again, we find that the US deferral structure is of no consequence in the application of Canada domestic law.

Other Issues XXXX

Section 4 Non-Corporate Rulings Division