Principal Issues: Irregular RRSP payments to a U.K. resident - are they exempt from Part XIII tax?
Position: No
Reasons: Payments in settlement of all future entitlements under the plan are not exempt under the treaty.
XXXXXXXXXX 2004-007731
S. E. Thomson
June 23, 2004
Dear XXXXXXXXXX:
Re: RRSP payments to U.K. resident
This is in reply to your email of May 19, 2004 in which you ask for our views on the correct amount of tax to be withheld from RRSP payments to a U.K. resident. As you have explained to us, the client lives in the United Kingdom and holds her self-directed RRSP with you in Canada. She takes monthly withdrawals, which are not a set amount, and are not mandatory. You understand that the correct amount of withholding is 25%, although the client believes there should be no withholding based on the treaty with the U.K.
OUR COMMENTS
Since the opinion you seek relates to a specific taxpayer and ongoing transactions, your query should be directed to the relevant tax services office where they will have the opportunity to review the surrounding facts. Nevertheless, we are able to offer the following general comments. Please note that because these comments are general in nature, they are not binding on the Canada Revenue Agency.
Payments from a registered retirement savings plan ("RRSP") to a non-resident are subject to a withholding tax of 25% by virtue of Part XIII of the Income Tax Act (the "Act"), subject to possible relief under an income tax treaty that Canada may have with the country of residence.
Under paragraph 1 of Article 17 of the current Canada-U.K. Income Tax Convention (the "current Treaty"), pensions arising in Canada and paid to a resident of the U.K. who is the beneficial owner thereof are taxable only in the U.K. The term "pension" is defined in the current Treaty to include payments under a retirement plan (which would include an RRSP) but does not include any such payment that is in settlement of all future entitlements under the plan. In addition to the definition of "pension" in the current treaty, the term "pension" is defined in the Income Tax Conventions Interpretation Act (the "ITCIA") for purposes of the treaty to include both a) the definition as provided by the treaty itself, and b) an expanded definition. The expanded definition of "pension" in the ITCIA includes a payment that would be a "periodic pension payment" as defined in the ITCIA. The term "periodic pension payment" is defined in the ITCIA to include a payment from an RRSP other than a) a payment before maturity, or b) a payment in full or partial commutation of the retirement income under the RRSP.
Therefore, under both the treaty definition and the expanded definition, if the RRSP payment is a payment that is in settlement of all future entitlements under the plan, it is not a "pension" for purposes of the current treaty. In our view, any payment out of the RRSP that would effect a decrease in future periodic payments would represent a "settlement of all future entitlements" under the plan. Therefore, in your scenario, we would expect that the irregular payments out of an unmatured RRSP would not be a "pension" for purposes of the current treaty, and would therefore be subject to Part XIII withholding tax in Canada. For more information, see the Information Circular 76-12R5, Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries With Which Canada Has A Tax Convention.
The Canada-U.K. Income Tax Convention was amended on May 7, 2003 (the "amended treaty"), effective January 1, 2005 in respect of withholding taxes. Under the amended treaty, paragraph 1 of Article 17 provides that "periodic pension payments" arising in Canada and paid to a resident of the U.K. who is the beneficial owner thereof are taxable only in the U.K. The term "periodic pension payments" is defined in the ITCIA, and is outlined above. In effect, therefore, under the new treaty, we would continue to be of the view that irregular payments out of an unmatured RRSP are subject to Part XIII withholding tax in Canada.
We trust that we have been of some assistance.
Yours truly,
Suzanie Chua, Acting Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate