Principal Issues: Is CRA prevented from imposing Part X.1 tax on excess contributions in a RRSP held by a resident of United States?
Position: No
Reasons: Part X.1 tax is a penalty tax and is not a tax on capital for the purposes of Article XXIII of the Canada-US Income Tax Convention.
2009-030871 XXXXXXXXXX Sylvie Labarre, CA (613) 957-8981 June 30, 2009
Dear Madam:
Re: Paragraph XXIII(4) of the Canada - US Income Tax Convention
This is in reply to your letter of January 27, 2009 in which you requested our interpretation of Paragraph XXIII(4) of the Canada - US Income Tax Convention (hereinafter the "Treaty").
In a particular situation, an individual who was a resident of Canada became a non-resident of Canada and a resident of the United States. At the time he left Canada, some excess contributions to his Registered Retirement Savings Plan (RRSP) were outstanding.
In your view, the tax imposed pursuant to Part X.1 of the Income Tax Act (the "Act") represents a tax on a portion of the capital held by the individual in his RRSP and the Canada Revenue Agency (CRA) cannot assess the individual for Part X.1 tax since he is resident of the United States and since paragraph XXIII(4) of the Treaty gives the state of residence the right to tax such elements of capital.
You want to know whether we agree with your view.
Our comments
The particular circumstances outlined in your message relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Ruling, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.
Paragraph XXIII(4) of the Treaty provides that all elements of capital (other than those covered by paragraphs 1 to 3) of a resident of United States shall be taxable only in United States.
CRA considers Part X.1 tax as a penalty tax that is not covered by Article XXIII of the Treaty. In CRA's view, the Part I.3 tax and the Part VI tax on the Capital of Financial Institutions are the types of taxes on capital contemplated by Article XXIII of the Treaty. Therefore, Canada has retained the right to tax excess contributions to an RRSP, as provided for in Part X.1 of the Act.
This opinion is not a ruling and accordingly it is not binding on the CRA.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch