At the time that a Canadian-resident individual renounced his U.S. citizenship, he held an Individual Retirement Account (“IRA”), to which he had contributed prior to becoming a Canadian resident. One week later, in the same taxation year, he fully collapsed the plan and had all funds distributed to him. Contributions to the IRA and 401(k) were made prior to the Individual becoming a resident of Canada.
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 on the day before the expatriation date, resulting in an income inclusion for such purposes. Because appropriate adjustments are made to subsequent distributions to reflect such treatment, the collapse of the plan 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.