Rev. Rul. 56-446

Advice has been requested whether a resident alien of Canada will be taxable for Federal income tax purposes on a lump-sum distribution from a United States resident employees' pension trust, when paid on account of an employee's separation from the service.

A nonresident alien, a resident in Canada, had been employed by a United States corporation, which has a contributory pension trust established in the United States for the benefit of its employees. The trust has been held to be qualified under section 401(a) of the Internal Revenue Code of 1954 for exemption from tax under section 501(a) of the Code. All the service of the nonresident alien had been performed in Canada, during which time he had contributed 2 x dollars to the pension trust while the corporation had contributed 4 x dollars. Upon the death of the employee, the beneficiary, also a nonresident alien residing in Canada, received a lump-sum distribution of the total amount standing to the credit of the employee from the resident trust in the amount of 8 x dollars.

Article VI A of the Tax Convention and Protocol between the United States and Canada, provides that pensions and life annuities derived from within one of the contracting States by a resident of the other contracting State shall be exempt from taxation in the former State. See T.D. 6047, C.B. 1953-2, 59.

However, section 402(a)(2) of the Code provides, in effect, that in the case of a qualified employees' trust, if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount of the distribution, to the extent exceeding the amount contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than six months.

Section 871 of the Code provides for the taxation of nonresident alien individuals, specifying the items of income to be included, the tax rate, etc. That Code section specifically includes amounts described in section 402(a)(2) which are considered to be gains from the sale or exchange of capital assets.

Section 894 of the Code, however, provides that income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation.

Article VIII of the United States-Canada Tax Convention, Treasury Decision 5206, C.B. 1943, 526, provides that gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.

In the light of these cited sections of the Code and the tax convention, it is unnecessary to consider whether the type of distribution in the instant case constitutes a capital gain, or a pension or life annuity under the tax convention, as under any of these classifications the distribution would be exempt from taxation in the United States.

Accordingly, where the total distributions payable, with respect to an employee for services rendered outside the United States, by a resident employees' trust, qualified under section 401(a) of the Code for exemption from tax under section 501(a) of the Code, are paid in one lump-sum to a nonresident alien residing in Canada on account of the employee's separation from the service, the distribution is exempt from Federal income tax under Article VI A or Article VIII of the United States-Canada Tax Convention as supplemented. See T.D. 5206, C.B. 1943, 526, and T.D. 6047, C.B. 1953-2, 59.