Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1) Are distributions from a Roth IRA to a resident in Canada subject to tax? 2) Will the conversion of a traditional IRA to a Roth IRA while non-resident in Canada jeopardize the election under ITTN-43?
Position: 1) Yes. 2) No.
Reasons: 1) According to Art. XVIII 3(b) of the Canada-US Tax Convention, a distribution from a Roth IRA is subject to tax to the extent it is included in taxable income if the individual was resident in the US. 2) The deferral outlined in ITTN-43 is only relevant to individuals resident in Canada and does not impact non-resident individuals.
Author: Tsang, Peky
Section: Art. XVIII 3(b) & 7 of the Canada-US Tax Convention
May 28, 2015
Re: Roth Individual Retirement Arrangement (“Roth IRA”) Contributions
This letter is in reply to your correspondence of April 10, 2015 wherein you asked whether withdrawals from a Roth IRA while resident in Canada would be subject to tax. You are also wondering whether the deferral outlined in Income Tax Technical News No. 43 (“ITTN-43”) would cease to apply if you converted your traditional Individual Retirement Account (“IRA”) into your Roth IRA prior to resuming 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)70-6R6, Advance Income Tax Rulings and Technical Interpretations.
A Roth IRA can be an individual retirement account (i.e. a custodial account or a trust) or an individual retirement annuity (i.e. an annuity contract or an endowment contract from a life insurance company). A Roth IRA is not a registered plan under the Act, and income and distributions will therefore be taxed according to the rules that apply to custodial accounts, trusts, annuity contracts or endowment contracts. Generally, the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (the “Convention”) may apply to defer or relieve taxation in Canada.
Subparagraph 3(b) of Article XVIII of the Convention provides that the term “pensions” generally includes a Roth IRA, within the meaning of section 408A of the Internal Revenue Code. As a result, under paragraph 1 of Article XVIII of the Convention, a distribution from a Roth IRA to an individual resident in Canada will generally be exempt from Canadian tax to the extent the distribution would be excluded from United States (“US”) taxable income if the individual was resident in the US.
Under paragraph 7 of Article XVIII of the Convention, a Canadian resident individual may elect to defer any taxation in Canada with respect to income accrued in a Roth IRA until such time as and to the extent that a distribution is made from the arrangement. The ITTN-43 outlines the procedures for making the election and is available on our website.
As you pointed out, the ITT.N-43 explained that the deferral only applies as long as no contribution is made to the Roth IRA after December 31, 2008, by or on behalf of the individual, while the individual is resident in Canada. The conversion of a traditional IRA into a Roth IRA would be considered to be a contribution to the Roth IRA for this purpose. However, it should be noted that the information outlined in ITTN-43 only apply to individuals resident in Canada. A conversion of your traditional IRA to your Roth IRA prior to resuming residency in Canada will not impact your ability to elect and defer any accrued income in your Roth IRA upon your subsequent resumption of residency in Canada.
We trust that our comments will be of assistance to you.
Lita Krantz, CPA, CA
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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