31 October 1988 Income Tax Severed Letter 7-3358 - [Tax Treatment of amounts received by residents of Canada out of an Individual Retirement Arrangement (IRA)]

REVENUE CANADA TAXATION MEMORANDUM

DATE OCT 31 1988

TO Taxpayer Assistance Section 8th Floor 400 Cumberland St.

FROM  Specialty Rulings Directorate
K.B. Harding
             (613) 957-2129

Attention: Sherry Moran, Manager

SUBJECT: Draft concerning the tax treatment        
                of amounts received by residents of       
                Canada out of an Individual Retirement Arrangement (IRA)

This is in reply to your Round Trip Memorandum dated October 13, 1988 requesting our comments on the proposed draft directive on IRAs.

We offer the following comments.

1. It is our understanding that contributions can be made into an IRA where the taxpayer does not get an exemption from income. Accordingly, we would suggest you insert the word "generally" before the sentence "an IRA is a personal savings plan..." in the introduction on page 1.

2. Probably an additional sentence should be added in paragraph 1 of item 1 on page 2 to reflect the fact that paragraph 94(l)(d) only permits us to tax the beneficiary in those situations where the trust earns income in the year in excess of $5,000 Canadian.

3. It is our view that the word "contributor" should be used instead of "beneficiary" in paragraphs 1 and 2 of item 2 on page 3 since the latter term is more applicable to a "trust" than a custodial account.

4. You may wish to insert a reference to three-year accrual rule where you indicate in paragraph 2 of item 2 on page 4 that prior years interest may be taxed in the year that the IRA is collapsed.

5. We would suggest you insert the reference to paragraph 110(l)(f) after the words "... any amounts rolled into an IRA." at the end of the 3rd sentence in paragraph 1 of item 3 on page 4. It has been indicated to us that the District Offices are not aware of the correct procedures for providing the exemption granted under tax treaties (i.e. an amount included in income which is exempt by treaty should be included in income and exempt from taxable income in accordance with paragraph 110(1)(f) of the Act).

6. You may also wish to make a reference to paragraph 110(1)(f) in item 4 on page 5.

7. We are not in agreement with the last sentence on paragraph 1 on page 8 dealing with "Foreign Tax Credit". It is our view that the foreign non-business-income tax is not reduced because only a portion of the IRA is included income for tax purposes. Accordingly, for purposes of subsection 126(1) of the Act the total tax withheld by the United States will be considered as foreign non-business-income tax paid even where little or no U.S. income is reported in Canada.

8. In view of the fact that we have had many calls on 401(k) plans we would suggest you advise the District Offices of our position (Refer to item 7 of our General Position). You may also wish to add that any amounts received from a 401(k) plan which would be exempt under paragraph 1 of Article XVIII of the Canada - U.S. Income Tax Convention would be subject to a paragraph 110(1)(f) deduction in Canada.

We trust these comments will be useful for your purposes.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch