Principal Issues: [TaxInterpretations translation] Where the withdrawal from a plan is made over a period of years by partial surrenders, do the payments qualify as non-periodic payments for the purposes of paragraph 60(j)?
Position: No.
Reasons: Paragraphs 60(j) and 60.01(a) are generally limited to lump sum payments. According to the dictionaries, a lump sum is a payment made as a one-time payment.
Financial Strategies and Financial Instruments Roundtable,
2006 APFF CONFERENCE
Question 6
Periodic payment vs lump sum payment
Paragraph 60(j) of the Act allows, inter alia, certain lump sum superannuation or foreign pension benefits to be transferred to an RRSP. Benefits that are part of a series of periodic payments cannot be transferred.
Amounts withdrawn from the foreign pension plan are often taxed by the source country, with taxes being withheld by the foreign plan administrator, and are generally considered to be pension income not derived from either a business or property. Consequently, since those amounts will also be taxed in Canada upon withdrawal from the RRSP, double taxation may occur unless the foreign tax paid on the withdrawal of an amount from an unregistered foreign pension plan qualifies for the foreign tax credit in the year of transfer.
Some general rules can be established as to where a transfer may be advantageous to the individual. In this case it will be where the foreign tax can be recovered in full through the foreign tax credit mechanism.
This requires, inter alia, Canadian source income in the year of the transfer at least equal to the foreign income (expressed in Canadian dollars) generated by the withdrawal. For example, an individual with a $500,000 IRA would have to receive Canadian source income in the same year of at least $500,000 to fully benefit from the foreign tax credit.
In order to benefit from the foreign tax credit where the total amount to be transferred exceeds the Canadian income for a year, it is preferable to spread the transfer over several years, while ensuring that the condition that it is a lump sum and not a periodic withdrawal is respected.
The individual could consider making the following transfers:
|
Year 1 |
Year 2 |
Year 3 |
|
|
Canadian income |
$200,000 |
$200,000 |
$200,000 |
|
IRA transfers |
$200,000 |
$200,000 |
$100,000 |
The Income Tax Conventions Interpretation Act contains a definition of periodic payments applicable to the interpretation of tax treaties, which refers to periodic payments for pension plans registered in Canada (an RRSP, RRIF, or registered pension plan). That definition is therefore not useful for qualifying foreign, i.e. unregistered, pension plans.
Where the withdrawal from a plan is made over a period of a few years by partial surrenders, can CRA confirm that the payments will qualify as non-periodic payments?
CRA Response
For the purposes of the Regulations (ITR), an IRA is generally a foreign retirement arrangement. Section 6803 ITR defines a foreign retirement arrangement as a plan or arrangement to which section 408(a), (b) or (h) of the United States Internal Revenue Code of 1986, as amended from time to time, applies. Where a taxpayer receives amounts from an IRA that is a foreign retirement arrangement, the amounts received are included in computing income under clause 56(1)(a)(i)(C.1) as retirement or pension income.
Furthermore, paragraph 60(j) provides, inter alia, a deduction for an eligible amount under section 60.01 that is included in computing the individual's income for the year under clause 56(1)(a)(i)(C.1) and is transferred to an RRSP of the individual. In addition, section 60.01 specifically excludes an amount that is part of a series of periodic payments. Section 60.01 applies to a lump sum that is a one-time payment, which does not include each instalment that is made as part of a series of periodic payments to settle a particular lump sum.
Consequently, we are of the view that the payments you describe in the above example are part of a series of periodic payments and do not constitute an eligible amount within the meaning of section 60.01.
Adèle St-Amour
(613) 998-0290
October 6, 2006
2006-019709