K.B. Harding (613) 957-2129
November 17, 1987
Dear
This is in reply to your letter of October 7, 1987 wherein you requested our opinion on whether the amounts received from certain types of income could be transferred to 7a registered retirement savings plans (RRSP).
Your letter indicates that you are in receipt of or eligible to receive the following types of income.
1. You are eligible to receive a lump sum payment, in lieu of a deferred pension from the XXX in respect of employment in the U.S. from XXXXXX when you were a resident of that country.
2. You are also in receipt of-
(a) Quebec Pension Plan (QPP) disability payment, (b) Wage loss replacement plan payment, and (c) U.S. Social Security disability payment.
We will comment on the treatment for tax purposes of the various types of income listed above.
A. XXX Fund
It is our view that if you receive a lump sum payment out of this Fund, the gross amount of the payment will be included in your income as a superannuation or pension benefit. Since the pension benefit is attributable to services rendered by you in a period during which you were not resident in Canada, the gross amount of the payment (before any taxes are deducted by the United States) may be transferred to a RRSP.
Under the Canada-U.S. Income Tax Convention (Convention) the U.S. government is not permitted to withhold tax at a rate in excess of 15% of the gross amount of the periodic pension payments made to a resident of Canada. However, the Convention does not impose a reduced rate of withholding tax on lump sum pension payments and it is our understanding that the U.S. government may withhold tax at the rate of 307. on such payments.
In order to obtain a deduction with respect to the lump sum payment you receive out of the Fund it may be sent directly to the RRSP by the Fund or it may be sent to you to be subsequently invested in an RRSP. In either case the U.S. government is entitled to the withholding tax described above.
B. QPP Disability Payment (QPP)
Any payment out of the QPP will be included in your income as pension income and may be transferred to an RRSP without affecting the regular amounts which may be contributed to an RRSP. The amount of QPP which is eligible for transfer to an RRSP is the gross amount (before taxes) included in income as a pension.
C. Wage Loss Replacement Plan Payment
Generally speaking, the gross amount of the payment received out of an income maintenance insurance plan is included in income as income from office or employment. Accordingly, the gross amount (pre-tax) will qualify for "earned income" for purposes of calculating the 20% maximum which may be transferred to an RRSP. (See attached copy of Interpretation Bulletin IT-428 to ensure whether amounts received by you are subject to tax.)
D. U.S. Social Security Disability Payment
Disability insurance benefits received under the U.S. Social Security Act are not considered to be income and are therefore not subject to tax in Canada provided you are under 65 years of age. Accordingly, you are not permitted to transfer any portion of the disability pension into an RRSP.
At the age of 65, the payments are treated as regular social security payments and are included in your income as pension payments. Since the Canada-U.S. Income Tax Convention only requires you to pay tax on 50 per cent of the social security payment received from the United
States, you will be permitted a deduction equal to one-half of the social security payment included in your income. However, you may transfer all or a portion of the pension receipt to an RRSP.
We trust these comments are suitable for your purposes.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernment Affairs Branch