2015-0576551E5 Election for U.S. Traditional IRA

Principal Issues: Whether an election is needed to defer tax on undistributed income accrued in a Traditional IRA per Article XVIII (7) of the Canada-US Tax Convention.

Position: No.

Reasons: An election is not necessary since the Act already provides for a deferral of taxation with respect to undistributed income accrued in a U.S. Traditional IRA.

Author: Hooey, Kathy
Section: 56(1)(a)(i)(C.1); 56(12);Article XVIII(7) of the Canada-United States Tax Convention (1980)

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                                                                                                                          2015-057655
                                                                                                                          K. Hooey
May 16, 2016

Dear XXXXXXXXXX:

Re: Election for Traditional IRA

This letter is in reply to your correspondence of March 3, 2015 regarding whether an election needs to be filed with the Canada Revenue Agency in order to defer taxation on undistributed income accrued in a United States traditional individual retirement arrangement (“Traditional IRA”). We infer from your letter that you rolled over a United States 401(k) plan to a Traditional IRA prior to establishing residency in Canada.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular (IC)70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

Under paragraph 7 of Article XVIII of the Canada-United States Tax Convention (1980) (the “Convention”), a Canadian resident who is a beneficiary of a tax-exempt plan in the United States that qualifies as a pension for purposes of the Convention may elect to defer taxation in Canada with respect to income accrued in the plan, until such time as and to the extent that a distribution is made from the plan.

Where the accrued income in the plan is not taxable under the Act until it is paid out of the plan, there is no benefit to an individual in making the election. Since the Act already provides for a deferral of taxation for a Traditional IRA, making an election is unnecessary. A Traditional IRA is prescribed as a foreign retirement arrangement (“FRA”) for Canadian tax purposes. Under clause 56(1)(a)(i)(C.1) and subsection 56(12) of the Act, a taxpayer is required to include in income amounts under an FRA only when amounts are paid or deemed to be paid out of the FRA.

We trust that our comments will be of assistance to you.

Yours truly,

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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