8-911125
Re: E. William Abrahamson v. M.N.R. (1991 DTC 213)
Your memorandum of April 23, 1991, to the Foreign Section, Rulings Directorate has been forwarded to you for reply. You requested our comments on the effect of the above mentioned decision on the Department's position as stated in Directive ASG-89-6 (the Directive").
The main issue of the Abrahamson decision is that it is contrary to the Departments position, as stated in ASG-89-6, that pension income retain its identity when it is paid from a U.S. pension plan to an Individual Retirement Account (IRA). The Department's position in paragraph 3 of the Directive is that a Canadian resident can roll amount from a U.S. pension to an IRA pursuant to Article XVIII of the Canada-U.S. Income Tax Convention (the "convention" but amount subsequently paid out of the IRA are considered to be pension benefits pursuant to subparagraph 56(1)(a)(i).
This position was applicable to both trusteed and custodial plans fully funded from pensions. Also, paragraph 4 of the Directive indicated that, for those plans partially funded from pension and partially from other sources, this position applied to the portion funded from the pension, and per paragraph 5, annuities from an IRA funded, or partially funded, by a rollover from a pension plan were treated similarly.
The Abrahamson decision did not uphold the Department's position that pension income retained its identity when it was flowed through an IRA. If we accept that position for all IRA's then paragraph 3, 4 and 5 of the Directive would no longer apply.
The Abrahamson decision was based on three factors. First, a right to tax the amount has to exit and the Department cannot rely on the Convention to grant this right. As explained in three below, the judge believed there was no right to tax these payments. Secondly, even if a tax free roll to an IRA under the Convention implied that subsequent payments from the IRA were taxable, the Convention was effective only from 1980 and was not in force in 1975. Thirdly, the IRA was a non-resident inter vivos trust and did not have the characteristics of a pension. The claim to a pension benefit was satisfied when the amount was paid out and the fact that it was transferred to an IRA was irrelevant.
21(1)(b)
for DirectorFinancial Industries DivisionsRulings Directorate