As a general rule, any amounts paid from a Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Fund (“RRIF”) to a non-resident of Canada are subject to a 25% tax under Part XIII of the Income Tax Act (“the Act”)
However, amounts paid to residents of certain countries with which Canada has a tax treaty may be subject to reduced rates.
Generally, these reduced rates will not be available for payments on a collapse of the plan or other lump-sum payments. Although, in years past, certain treaties would have allowed reduced rates for lump-sum payments, that no longer the case. The reduced rates in treaties normally only apply to “periodic” payments.
For most treaties, this will allow a 15% rate. However, in the case of Canada’s tax treaty with the UK, a complete exemption from Canadian tax can apply to periodic payments.
The treaties generally do not define “periodic”. However, section 5 of Canada’s Income Tax Conventions Interpretations Act provides a definition.
In the case of payments under a RRSP, it normally can only apply to payments to be made over the lifetime of the annuitant, or a period of at least 10 years.
In the case of payments under a RRIF, it generally cannot exceed the greater of: (a) 10% of the value of the RRIF property at the beginning of the relevant year, or (b) two times the “minimum amount” that must be withdrawn for that year.
What happens when a non-resident who is the beneficiary of a RRSP or RRIF dies?
In general, the Act (see subsection 146(8.8) and paragraph 214(3)(c), and subsection 146.3(6) and paragraph 214(3)(i) respectively) will deem the beneficiary to have received the value of the assets in the plan immediately before death, and 25% tax under Part XIII of the Act will apply
However, tax under Part XIII will not be applied to the value in such plans at the time of the non-resident’s death to the extent that such value becomes payable to the spouse of the non-resident.
A non-resident spouse who receives a payment as a “refund of premiums” from, in turn, a RRSP or RRIF, of which the deceased non-resident was an annuitant, may defer Part XIII tax on any portion thereof to the extent that such payment is transferred on behalf of the recipient:
- to an RRSP of which that non-resident spouse is the annuitant;
- to acquire a qualifying annuity of which that non-resident spouse is the annuitant; or
- to an RRIF of which that non-resident spouse is the annuitant.
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Such transfer must be made pursuant to an authorization in prescribed form (CRA form NRTA1).
In certain cases, a non-resident receiving a payment from a RRSP or RRIF will be able to reduce his or her liability for Canadian taxes by electing to file a return under section 217 of the Act.
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Email: matlas@TaxCA.com
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