Lessons in Income from the U.S.
If you receive income from the United States, a pair of tax decisions released this summer may be of interest as each deals with a different type of U.S. income and its appropriate treatment for Canadian tax purposes.
The first case involved Jagmohan Singh Gill. Mr. Gill's sister, a U.S. citizen at the time of her death in 2004, held an individual retirement account (IRA) with OFI Trust Co. An IRA is a U.S. retirement plan similar to an RRSP which provides both a tax deduction when amounts are contributed, tax-free growth of the funds inside the plan, and tax payable when the money is withdrawn.
Mr. Gill was named as the beneficiary of the account. In 2005, he received a lump-sum amount of $75,000 on the redemption of the IRA, which he did not include on his return. His return was later reassessed by the Canada Revenue Agency and he was charged tax on the value of the IRA received.
Unfortunately for Mr. Gill, there was not much the tax court judge could do as the Income Tax Act is quite clear on the rules governing a "foreign retirement arrangement," which includes an IRA.
Under the act, you must include in income "any payment out of or under a foreign retirement arrangement." This mirrors the U.S. treatment which would have taxed Mr. Gill in the U.S. on the amount received had he been a U.S. resident.
The second case involved Jeffery D. Guy, who was fighting the loss of his Guaranteed Income Supplement (GIS) under the Old Age Security (OAS) Act for the period ended June 2012.
During the period in question, Mr. Guy received a U.S. government pension of $13,464. The CRA included that amount in his income for calculating his GIS eligibility. By doing so, it put his income just over the amount necessary to qualify for the GIS.
Mr. Guy objected. He argued that since his U.S. pension was tax-exempt in the U.S. and therefore, under the Canada-U.S. tax treaty, was also tax-exempt in Canada, it should be excluded from the calculation of net income on which GIS is based.
Unfortunately for Mr. Guy, the GIS calculation isn't based on taxable income but rather on net income, which includes his U.S. pension income, even if it wasn't taxable in Canada.
Mr. Guy then tried comparing his position to that of someone earning rental income in that they only had to include net rental income for the purposes of calculating GIS entitlement.
The judge disagreed, saying, "You are comparing apples and oranges .... The person earning rental income has legitimate business expenses to be applied against that income to get it down to a net position. With respect to a pension, there are no such expenses. Total income and net income are one and the same."
As a result, Mr. Guy was unsuccessful in collecting his GIS.