At the time that a Canadian-resident individual renounced his U.S. citizenship, he held an Individual Retirement Account (“IRA”), and a 401(k) Plan (classified as a pension for ITA purposes). He had contributed to both prior to becoming a Canadian resident. One week after the renunciation, and in the same taxation year, he fully collapsed the two plans and had all funds distributed to him.
Under the U.S. tax rules, by virtue of the expatriation, he was treated as having received a distribution of his entire interest in the IRA, and of the present value of his 401(k) plan, the day before the expatriation date, resulting in an income inclusion for such purposes. The collapse of the plans did not result in an income inclusion for U.S. tax purposes to the extent that they were subject to tax on expatriation.
CRA indicated that the deemed distribution for U.S. purposes of his entire interest in the IRA upon expatriation resulted in a corresponding deemed receipt in his income under s. 56(12) and that, by virtue of the exclusion to this effect in s. 56(1)(a)(i)(C.1), on the subsequent actual distribution there would be no inclusion under s. 56(1)(a)(i) to the extent that the amount was not taxed in the U.S.
In the case of the 401(k) plan, which (unlike the IRA) was not a “foreign retirement arrangement,” there was no income inclusion upon expatriation, but there would be an income inclusion pursuant to s. 56(1)(a)(i) in respect of a “superannuation or pension benefit” on the distribution. However, to the extent that the distribution would have been excluded from taxable income in the U.S. were he a resident thereof, Art. XVIII(1) of the Canada-US Treaty would provide relief from tax for the same amount in Canada (accomplished through an s. 110(1)(f)(i) deduction from taxable income).