Principal Issue: [TaxInterpretations translation]
Is a French "life insurance" investment similar to an RRSP
1. considered foreign property for the purposes of Form T1135?
2. taxable in Canada?
Position:
According to the facts presented,
1. Yes
2. Yes
Reasons:
Under the terms of the Act and the Canada-France Convention
July 31, 2002
| Montreal Tax Services Office Client Services Division 305 René-Lévesque Blvd. West, Section 471-1-1 Montreal (Québec) H2Z 1A6 Attention: Ms. Carole Sicotte |
Headquarters |
Canada-France Convention
This is in response to your memo of April 25, 2002, and to our telephone conversations (Sicotte/Godin/Daaboul), in which you requested our opinion on the above subject in relation to the situation described below.
FACTS
Our understanding of the facts is as follows. In France, there is a form of investment called "assurance-salaire-vie" for which the contributions are deductible. This investment, which is similar to a registered retirement savings plan, is tax-sheltered in France, except that a withdrawal from it is taxable only if made within the first eight years of the contribution.
QUESTIONS
You asked for our opinion regarding the following two cases:
Situation 1:
After its holder has immigrated to Canada, will an investment of this nature be part of foreign property for the purposes of a return covered by Form T1135 - Foreign Income Verification Statement?
Situation 2:
Would the withdrawal of such an investment after the holder's immigration to Canada be taxable in Canada?
OUR COMMENTS
Since we do not have all the details relating to this type of investment, nor those relating to the present situation, we are unable to give you a categorical answer as to the applicable tax treatment. However, we offer the following general comments:
Situation 1:
Pursuant to subsection 233.3(3) of the Income Tax Act (the "Act"), a "reporting entity" is generally required to file a return with the Minister in prescribed form, T1135, for a taxation year on or before the day specified in that subsection. Under subsection 233.3(1), a "reporting entity" is defined as a "specified Canadian entity" where the total cost amount of its "specified foreign property" exceeds $100,000 at a particular time. A "specified Canadian entity" is defined in subsection 233.3(1) as a taxpayer resident in Canada in the year, other than a taxpayer referred to in subparagraphs (a)(i) to (viii). The expression "specified foreign property" is also defined in subsection 233.3(1) as including, as per subparagraph (a)(i), "funds or intangible property which are situated, deposited or held outside Canada".
Thus, in this situation, the investment would be subject to a return requirement on prescribed form T1135 to the extent that it is held by a "specified Canadian entity", it constitutes "specified foreign property" within the meaning of subsection 233.3(1) by virtue of subparagraph (a)(i), and the total cost amount of the "specified foreign property" held by the "specified Canadian entity" exceeds $100,000.
In addition, the cost amount of the investment to its holder in respect of the $100,000 limit imposed by the definition of "specified Canadian entity" will be determined either on the basis of its acquisition cost or according to the rule provided for in paragraph 128.1(1)(c) in the case where the property, which was acquired before the holder's immigration to Canada, is the subject of a deemed disposition pursuant to paragraph 128.1(1)(b).
Subsection 128.1(1) applies where a taxpayer becomes resident in Canada at a particular time. Under paragraph 128.1(1)(b), such a taxpayer is deemed to have disposed of each property (other than certain property where the taxpayer is an individual) before the time that is immediately before the particular time, for proceeds of disposition equal to its fair market value. Where a property is deemed to have been disposed of pursuant to paragraph 128.1(1)(b), the taxpayer is deemed to have reacquired the property at the immigration time, pursuant to paragraph 128.1(1)(c), at a cost equal to such proceeds of disposition.
Situation 2:
Paragraph 1 of Article XVIII - Pensions and Annuities of the Canada-France Income Tax Convention Act (the "Convention") provides that:
Periodic or non-periodic pensions and other similar allowances arising in a Contracting State and paid in respect of past employment to a resident of the other Contracting State shall be taxable only in the Contracting State in which they arise.
The term "pension" is not defined in the Convention. However, section 5 of the Income Tax Conventions Interpretation Act defines the term, but only with respect to payments arising in Canada.
Although not knowing whether or not the investment constitutes a pension under the domestic legislation of its source state (France), since all of the contributions to this type of investment represent employee contributions only, it would be difficult to consider the withdrawal from such an investment as a pension for the purposes of applying paragraph XVIII(1) of the Convention as well as for the purposes of the Act.
On the other hand, paragraph 3 of Article XVIII of the Convention states that:
Annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the State in which they arise. The term "annuities" means stated sums payable periodically at stated times, during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money's worth.
Since, according to the facts presented in the present situation, the holder is entitled to make a partial or total withdrawal of the individual’s investment at any time, such a withdrawal does not appear to constitute an annuity for the purposes of Article XVIII(3) of the Convention.
Furthermore, Article XXI - Income Not Expressly Mentioned of the Convention provides that:
1. Subject to the provisions of paragraph 2 of this Article, items of income of a resident of a Contracting State which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.
2. However, if such income is derived by a resident of a Contracting State from sources in the other Contracting State, it may also be taxed in the State in which it arises, and according to the law of that State. …
Thus, under Article XXI of the Convention, the amount of the withdrawal would be taxable only in Canada and, consequently, any excess of the amount of the withdrawal over the cost amount of the investment, as discussed above, would be included in computing income. However, this same amount could also be taxable in France if the holding period prescribed by French law of eight years, from the date of contribution of the investment to the date of its withdrawal, was not satisfied.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require any additional information concerning this document, please do not hesitate to contact us.
Best regards,
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch