Shortly after renouncing his U.S. citizenship, a Canadian resident fully collapsed his IRA and 401(k) plan, so that all funds were distributed to him.
Under the U.S. tax rules, by virtue of the expatriation, he was treated as having received a distribution of the present value of his 401(k) plan, the day before the expatriation date, resulting in an income inclusion for such purposes. The subsequent collapse of the plan did not result in an income inclusion for such purposes to the extent the amounts had been subject to tax on expatriation.
There was no ITA income inclusion upon expatriation regarding the 401(k) plan, but there was an income inclusion pursuant to ITA 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).