http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/229744/index.do
McKenzie v. The Queen (April 5, 2017 – 2017 TCC 56, D’Auray J.).
Précis: Ms. McKenzie received roughly $22,000 from the US IRA of her late mother, who had been a resident of the United States prior to her death (and not a resident of Canada). CRA assessed the amount as income pursuant to clause 56(1)(a)(i)(C.1) of the Income Tax Act (the “Act”). Counsel for Ms. McKenzie argued that an alternative method of taxation applied and that the position contended by CRA would result in double taxation (under each of section 56 and section 70) within the provision of paragraph 248(28)(a) of the Act. The Court rejected both arguments. Distributions from US IRAs were clearly covered by clause 56(1)(a)(i)(C.1). Subsection 70(5) did not apply to result in double taxation since it only applied to Canadian residents and Ms. McKenzie’s late mother was not a Canadian resident. As a result the appeal was dismissed with costs.
Decision: The Court rejected the taxpayer’s counsel’s argument that an alternative basis for taxation was available to Ms. McKenzie:
[38] I do not agree with the appellant that there is an alternative method for recording income, namely that the US IRA inherited by the appellant from her mother be treated as an investment portfolio (capital property) and that a capital gain should be included in her income pursuant to subsection 39(1) of the Act, upon the disposition of the shares by the appellant or that a deemed disposition occurred when the appellant inherited the US IRA from her mother pursuant to subsection 70(5) of the Act.
[39] The Act, more particularly clause 56(1)(a)(i)(C.1), section 6803 of the Regulations and subsections 408(a) and 408(h) of the US Internal Revenue Code deals specifically with the situation at bar. In addition, subsection 70(5) of the Act does not apply in this appeal, since 70(5) (capital property of a deceased taxpayer) applies to residents of Canada only. The appellant’s mother, Betty Ann Wicks, was not a resident of Canada; therefore there was no deemed disposition for Canadian income tax purposes under the Act upon her death.
The Court similarly rejected the double taxation argument advanced for the taxpayer:
[43] The position of the appellant is stated in paragraph 25 of her written submissions:
Given that a disposition of securities and its correspondent withdrawal of funds leads to double taxation, (Section 70(5)(a) and (b) and Subsections 56(1)(a)(C.1) of the Income Tax Act), our position is that Subsection 248(28) of the Income Tax Act would receive application by requiring the de-activation of an otherwise applicable tax provision.
[44] Subsection 70(5) of the Act deals with the capital property of a deceased taxpayer. Pursuant to subsection 70(5) the deceased taxpayer shall be deemed to have disposed of each capital property and received proceeds of disposition equal to the fair market value of the property before the death.
[45] As I stated earlier, subsection 70(5) of the Act is not applicable in this appeal. The appellant’s mother, Ms. Wicks, was not a resident of Canada. She was a resident and citizen of the United States. The appellant’s mother would not have been subject to a deemed disposition pursuant to subsection 70(5) as this provision does not apply to non-resident person.
As a result the appeal was dismissed. Costs were awarded to CRA which is unusual in an informal procedure appeal, suggesting that the Court was somewhat annoyed by the lines of argument advanced on the taxpayer’s behalf.