Monthly Archives: April 2016

CANADIAN TAXATION OF DEATH BENEFITS FROM A U.S. IRA

Can-USA Canadian resident would not normally expect to pay any Canadian income tax on an inheritance received from a family member living in the U.S.

However, that is exactly what can happen if a Canadian resident receives a payment as a beneficiary of a (conventional) Individual Retirement Account (“IRA”).

That is because of the fact that under Regulation 6803, such a plan is a “foreign retirement arrangement”. This means that, under Clause 56(1)(a)(i)(C.1) of the Income Tax Act, the payment will be included in income.

The fact that the payment would be received by the Canadian resident as a beneficiary on death, as opposed to a situation where the recipient was the contributor to the plan, would not appear to change anything.

This issue was the subject of an appeal to the Tax Court of Canada in Gill v. The Queen (2012 DTC 1261). Both that decision, and the subsequent decision of the Federal Court of Appeal (2013 DTC 5106) affirmed the CRA’s position that the amount was taxable.

Any US taxes payable by the recipient on that receipt would be eligible for foreign tax credit against the Canadian taxes payable. In this regard, I am advised by U.S. tax pros that the U.S. should allow the reduced 15% rate provided in Article XVIII(2)(a) of the Canada-U.S. Tax Convention, even though the payment is not “periodic”[1]. In addition, if there were any portion of the payment that would not be taxable under U.S. tax law if the recipient were a US resident, it should be exempt from taxation in Canada under Article XVIII(1). Likely, this would not be the case with a conventional IRA,

However, the exemption from Canadian taxation under Article XVIII(1) should mean that if the IRA is a “Roth” IRA, rather than a “conventional” one, the payment should not be subject to Canadian tax. That is because payments from a Roth IRA, which is quite similar to a Canadian TFSA, are not subject to U.S. taxation.

 

[1] Based on the application of Reg. 1.1441-2(b)(ii). However, not all U.S. tax experts appear to agree with that.

DECISION IN CONRAD BLACK TAX CASE SHOWS “FLIP SIDE” OF ANTI-AVOIDANCE RULE FOR CANADIAN EMIGRANTS

Many tax practitioners were quite surprised by the decision of the Federal Court of Appeal (Black vs. Canada-2014 FCA 275) and the previous decision of the Tax Court of Canada, both in 2014, regarding Lord Conrad Black. On the face of it, I think most people were shocked by the notion that a Canadian expat who… Continue Reading

FOR CANADIANS MAKING OFFSHORE VOLUNTARY DISCLOSURES, SLOPPINESS WITH CORPORATE RESIDENCY MAY BE A BLESSING!

With all the furor arising from the now infamous “Panama Papers”, more and more Canadians with undeclared offshore holdings will become very nervous about their situations. Whether they have been clients of Mossack Fonseca or not, the prospect of heightened levels of scrutiny and disclosure regarding offshore holdings is certainly a reality. It seems more… Continue Reading

CANADIAN FOREIGN TAX CREDITS AND TAX TREATIES-MYTH VS. REALITY

CANADIAN FOREIGN TAX CREDITS AND TAX TREATIES-MYTH VS. REALITY Ever since I can remember, I have heard people reiterate what appears to be a common misconception regarding the ability of Canadians to claim a credit, for foreign taxes that they pay, against their Canadian tax liability. This myth seems to be widespread among accountants who… Continue Reading

MARCH 22, 2016 CANADIAN FEDERAL BUDGET TARGETS TREATY SHOPPING AND OTHER PERCEIVED ABUSES

For many years now, the Canada Revenue Agency (“CRA”) and the Ministry of Finance seem to have been fighting a losing battle to combat what they perceive to be the abusive use of tax treaties to reduce Canadian taxes. In recognition of the concern regarding this area, the “General Anti-Avoidance Rule” (“GAAR”), found in section… Continue Reading