27 November 1989 Income Tax Severed Letter AC74504 - U.S. Treaty, U.K. Treaty - Meaning of Pension

November 27, 1989

Source Deductions Division                   Financial Industries
                                               Division
L. Mancino, Director                         D.S. Delorey
                                             957-3495

Attention:  R.F. Power
            Non-Resident Taxation

                                             File:  7-4505

Subject: Canada-U.S. Income Tax Convention ("U.S. Treaty")
         Canada-U.K. Tax Convention ("U.K. Treaty")
         Meaning of Pension

This is in reply to your memorandum of November 10, 1989 concerning the meaning of the term "pension" for the purposes of the reference treaties.

The particular situation involved is one where annuity payments are being made to a U.K. resident under a registered retirement savings plan ("RRSP"). With respect thereto, you ask the following:

A. Does Article XVII(1) of the U.K. Treaty apply to exempt the payments from Part XIII tax on the basis that they are "pension" payments or, since the payments represent an "annuity" as defined in that treaty, are the payments subject to a 10% tax pursuant to Article XVII(2) of the treaty.

B. If the payments were being made to a U.S. resident, would the reduced rate of 15% under Article XVIII of the U.S. Treaty apply.

C. Would the answers to A and B above be the same if the annuity payments were being made under a registered retirement income fund ("RRIF").

For the purposes of the U.K. and U.S. Treaties, we are of the view that both an RRSP and an RRIF are "retirement plans". With this in mind, our comments with respect to your queries are as follows;

U.K. Treaty

1. RRSP Payments

     (a)  Under Article XVII(3) of the U.K. Treaty, any periodic
          or other payment under a retirement plan (e.g., RRSP or
          RRIF) is a "pension", except to the extent that the
          payment is in settlement of all future entitlements
          under the plan.  Thus, an annuity purchased with RRSP
          funds or any other payment under an RRSP to a U.K.
          resident would represent a pension payment exempt under
          Article XVII(1) of the U.K. Treaty from Part XIII tax,
          except to the extent that it is a commutation of future
          annuity payments.  In this latter case, the commutation
          payment would be subject to a 25% tax pursuant to
          paragraph 212(1)(1) of the Act, except to the extent
          that the exclusion in that paragraph applies. 

     (b)  While periodic payments under an RRSP will also
          represent an "annuity" within the meaning given to that
          term in Article XVII(4) of the U.K. Treaty, those
          payments will nevertheless be exempt, as stated in (a)
          above, from the 10% tax otherwise exigible under
          Article XVII(2) of that treaty.  It is our view that a
          tax cannot be imposed under one provision of a treaty
          when another provision in the treaty provides an
          exemption.

Conclusion: An annuity purchased with RRSP funds or any other payment under an RRSP flows tax-free to a U.K. resident, unless the payment is in respect of a commutation of future annuity payments. In the latter case, the payment is subject to a 25% tax on the extent mentioned in (a) above.

2. RRIF Payments

     (a)  As noted in 1(a) above, any periodic or other payment
          under an RRIF is a pension except to the extent that
          the payment is in settlement of all future
          entitlements.  It is our view that any     withdrawals
          out of an RRIF in excess of the minimum annual amount
          represent such a settlement.  Thus, only the minimum
          annual amounts payable under an RRIF flow tax-free to a
          U.K. resident under Article XVII(1) of the U.K. Treaty.

     (b)  Under the definition of "annuity" in Article XVII(4)of
          the U.K. Treaty, payments out of an RRIF in excess of
          the minimum annual amount are not an annuity for the
          same reason they are not a pension (see 2(a) above). 
          Whether or not periodic payments under an RRIF of the
          minimum annual amounts would represent an annuity under
          the U.K. Treaty is a moot point given that they would
          flow tax-free as pension income for the reason set out
          in 1(b) above.

Conclusion:    A payment to a U.K. resident of the minimum annual
               amount payable under an RRIF flows tax-free to the
               U.K. resident.  Any payment under an RRIF in
               excess of the minimum annual amount is subject to
               a 25% tax pursuant to paragraph 212(1)(q) of the
               Act.

U.S. Treaty

3. RRSP Payments

     (a)  Under Article XVIII(3) of the U.S. Treaty, any periodic
          or other payment under a retirement plan (e.g., an RRSP
          or RRIF) is a "pension".  However, the reduced 15% rate
          under Article XVIII(2)(a) of the treaty applies only
          where the payment is periodic.

     (b)  Under the definition of "annuities" in Article VIII(4)
          of the U.S. Treaty, excluded therefrom is any annuity
          the cost of which was deductible for the purposes of
          taxation in Canada.  In our view, this excludes all
          annuity payments under an RRSP in that the annuity is
          purchased with RRSP funds that originated from
          contributions that were deductible. 

Conclusions:  A periodic payment to a U.S. resident under an RRSP
              is subject to a 15% tax.  Otherwise, the payment is
              subject to a 25% tax under paragraph 212(1)(1) of
              the Act, except to the extent that the exclusion in
              that paragraph applies. 

4. RRIF Payments

          For the reasons given in 3(a) and (b) above, it is our  
          view that payments to a U.S. resident under an RRIF
          will qualify for the reduced 15% tax only if they
          represent periodic payments.  Otherwise, they are
          subject to a 25% tax pursuant to paragraph 212(1)(q) of
          the Act.

As indicated in 1 and 2 above, whether or not a payment to a U.K. resident under an RRSP or RRIF is periodic is irrelevant. It is relevant, however, for the purposes of the U.S. Treaty (as indicated in 3 and 4 above) and for the purposes of those treaties wherein the terms "annuity" and "pension" are not defined. The question of whether or not a payment is periodic is currently under review. As mentioned to you during our telephone conversation (Delorey/Power), we have recently (Nov. 16, 1989) requested the views of the Provincial and International Relations Division on this matter. We will advise you once the issue is resolved.

for Director Financial Industries Division Rulings Directorate