18 July 1988 Income Tax Severed Letter 5-5304 - [880718]

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.

Revenue Canada Taxation Head Office

K.B. Harding (613) 957-2129

JUL 18 1988

Dear XXXX

This is in reply to your letter of December 17, 1987 concerning the treatment of amounts received out of an IRA as well as amounts received from the United States by a resident of Canada in the form of interest, dividends, capital gains and social security benefits.

Unless a portion or all the capital contributed to an IRA resulted from a rollover of U.S. Pension Plan or 401(K) plan, where a Canadian resident is in receipt of a lump sum amount out of an IRA such amount is exempt from tax in Canada except to the extent of the income earned in the trust or custodial account in the year the amount is received. If the Canadian resident is in receipt of an annuity out of such a custodial or trust account IRA, the portion of the annuity that represented the capital in the IRA, which was used to purchase the annuity, would also be exempt from tax in Canada.

Where amounts have been rolled from a U.S. pension fund or 401(K) plan to an IRA any lump sum or annuity payment received out of the IRA will be subject to tax in Canada as pension income.

Payments made out of an IRA to a resident of Canada will generally be subject to 15% U.S. withholding tax in the case of annuities or 30% withholding tax in the case of lump sum payments. In order to avoid double Taxation Canada will provide a resident of Canada with a foreign tax credit in respect of taxes paid to the United States.

Generally speaking, income received from investments in the United States by residents of Canada will be subject to tax in Canada. In addition, the United States is permitted under the Canada-U.S. Income Tax Convention to withhold tax at the rate of 15% with respect to dividends and interest.

In the case of capital gains arising in the United States, you may be subject to tax in that country on such gains and we would suggest you contact the IRS on this question. However, you will also be subject to tax in Canada on capital gains arising in the United States to the extent that the gains arose after you become a resident of Canada.

Where both countries tax the same investment income, Canada will provide you with a foreign tax credit which may be deducted from Canadian tax in order to avoid double taxation.

Benefits under the social security legislation of the United States paid to a resident of Canada are taxable only in Canada. However, you will only be required to include one-half of the U.S. social security benefits in your income for Canadian taxation purposes.

If, however you are a U.S. citizen or a resident alien of the United States and living abroad, you may be taxed in the United States on your worldwide income, rather then the method described above. We would suggest you contact the IRS to determine your reporting requirements and rates of withholding tax on payments made to you while you are a resident of Canada.

If you wish a response to any additional questions please advise us whether you are a U.S. citizen since our response may be different with respect to the treatment provided by the United States.

We are attaching a copy of our general position as it relates to the taxation of Canadian residents on amounts received out of an IRA. We trust these comments are of assistance to you.

Yours truly,

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