What you describe was true, but the rules have changed.
The 15% tax/withholding now applies to trust distributions in an I
ccount (IRA). I know TD Waterhouse USA/ TD Ameritrade takes out the 15%. A quick google search did not reveal give me an authoritative source for this treatment.
Ruddy tax law- as soon as you think you understand a little how it works, they go and change it on you ...
Thank you for updating me on current practice!
I think- emphasis on "think", not "know"- that the recent change you note is due to CRA tightening up its application of Canada - US Tax Treaty
derived rules- IOW, it reflects a policy decision to interpret and apply the Treaty-based exemptions literally, instead of more broadly, rather than a change in the legal rules as such:
Canada - US Tax Treaty - Article XXI wrote:Exempt Organizations
2. Subject to the provisions of paragraph 3, income referred to in Articles X (Dividends) and XI (Interest) derived by:
(a) a trust, company, organization or other arrangement that is a resident of a Contracting State, generally exempt from income taxation in a taxable year in that State and operated exclusively to administer or provide pension, retirement or employee benefits; or
(b) a trust, company, organization or other arrangement that is a resident of a Contracting State, generally exempt from income taxation in a taxable year in that State and operated exclusively to earn income for the benefit of an organization referred to in subparagraph (a);
shall be exempt from income taxation in that taxable year in the other Contracting State. [emphasis added]
This is the RRSP/ IRA/ other tax-deferred retirement account exemption- note, however, that the exemption refers specifically to "income referred to in Articles X (Dividends) and XI (Interest)". The problem, I think, is that Canadian income trust distributions are now being characterized by CRA as "Other Income" referred to in Article XXII, and thus not falling within the tax exemption in Article XXI:
Canada - US Tax Treaty - Article XXII wrote:Other Income
1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State, except that if such income arises in the other Contracting State it may also be taxed in that other State.
2. To the extent that income distributed by an estate or trust is subject to the provisions of paragraph 1, then, notwithstanding such provisions, income distributed by an estate or trust which is a resident of a Contracting State to a resident of the other Contracting State who is a beneficiary of the estate or trust may be taxed in the first-mentioned State and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the income ... [emphasis added]
This policy change in application was no doubt driven precisely by the fear of foreseeable cross-border tax leakage as a result of the increasing amount of Canadian income trusts being held in US tax-deferred/ exempt retirement accounts.
(N.B.: I'm not a tax practitioner, and the above is not tax advice- consult a tax professional for your own situation ...)