Tax Interpretations Judicial and CRA interpretations of Canadian tax law and transactional implications

Treaties - Article 18 – Pensions and Annuities

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Cases

Rodrigue v. The Queen, 2001 DTC 5296, 2001 FCA 157

In rejecting a submission of the taxpayer that he was entitled to a deduction for a contribution to a pension plan in the United States that was not registered by the Minister of National Revenue, the Court found (at p. 5297) that the phrase "income accrued" in paragraph 7 of Article XVIII of the Canada-U.S. Convention were "clearly meant to exempt only income earned on money in the plan, not contributions of capital made into the Plan." In any event, paragraph 7 had not come into force with respect to the taxation year in which the contribution was made.

See Also

Dumoulin v. The Queen, 2003 DTC 872 (TCC) (Informal Procedure)

Canada pension plan payments made to the taxpayer were subject to 25% withholding given that Article 18 of the Canada-Swiss Convention, which reduced the withholding tax rate to 15% on periodic pension payments, did not apply to "payments under social security legislation in a Contracting State".

Merrins v. The Queen, 2002 DTC 1848, Docket: 2001-304-IT-I (TCC) (Informal Procedure)

Although the taxpayer was a resident of Ireland, he qualified for payments under the Old Age Security Act (Canada) because at the time he left Canada he had resided in Canada for more than 20 years.

The taxpayer unsuccessfully submitted that the old age security payments qualified as a "pension" for purposes of the Canada-Ireland Treaty (which define pensions as "periodic payments made in consideration of past services") because those payments were granted in consideration of twenty years of residence in Canada during which he rendered a contribution to the Canadian economy. The old age security payments were not related to the performance of past services, but rather to age and residency requirements.

Levert v. The Queen, 2001 DTC 781, Docket: 1999-566-IT-I, 1999-568-IT-I (TCC) (Informal Procedure)

A disability pension received by the taxpayer from the United Steelworkers of America as a result of group term life insurance provided by them was exempt from tax under the Act in light of evidence that the payments were exempt under the Internal Revenue Code.

Coblentz v. The Queen, 96 DTC 6531 (FCA.)

The taxpayer, while a Canadian resident, received a lump sum payment on the winding-up of a pension fund operated by his former U.S. employer. His election in filing his U.S. tax return for the year of receipt, to treat the lump sum as a lump sum distribution under s. 402 of the U.S. Internal Revenue Code and to apply the 10-year averaging rules thereto (with the result that the sum was deducted from gross income, in arriving at taxable income for U.S. tax purposes) did not result in an exclusion of that sum from his Canadian income under paragraph 1 of Article XVIII of the Canada-U.S. Convention. The purpose of the deduction from gross income under the Code was merely to enable him to have the amount taxed under a different (non-standard) regime.

Administrative Policy

26 September 2014 T.I. 2014-0531441E5 [employee long-term disability payments: remuneration under ITA; pension under Cda-U.S. Convention]: A Canadian resident employee, after qualifying for benefits under the unfunded long term disability plan ("LTD Plan") of the Canadian resident employer, becomes a resident of the U.S. Under the terms of the Plan, the employee is not required to fulfill any duties of employment and will continue to receive benefits until the earlier of rehabilitation and commencement of benefits under the employer pension plan. Would Part XIII withholding apply?  CRA stated:

[T]he LTD Plan payments would be salary, wages or other remuneration…because they would be amounts arising out of the employment relationship. … As such… withholdings under Part XIII would not be applicable… [and] the LTD Plan payments would be subject to withholding under paragraph 153(1)(a)… .

While the LTD plan payments would be taxable as income from employment for purposes of the Act, such income would be considered as being pension income for the purposes of applying the provisions of the Convention. This is due to the fact that paragraph 3 of Article XVIII (Pensions and Annuities) of the Convention defines the term "pensions" as including any payment under a sickness, accident or disability plan (i.e., the LTD Plan). Consequently, one must refer to the provisions of Article XVIII of the Convention rather than those of Article XV (Income from Employment)… .[A] U.S. resident employee receiving LTD Plan payments could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII… .

13 May 2014 T.I. 2014-0525491E5 [lump sum RRSP commutation not eligible for reduced withholding under Polish Treaty]:  As “pension” was not defined in the Canada-Poland Treaty,  s. 5(a) of the Income Tax Conventions Interpretation Act applied, so that all of the RPP, RRSP, OAS, CPP and QPP payments made to the Taxpayer (a former Canadian who became a Polish resident) were to be considered "pensions" for the purposes of the Treaty.  In light of the definition of “periodic pension payments” in . 5(a):

a payment from an RRSP before maturity or in full or partial commutation of the retirement income under an RRSP…is not considered to be a "periodic pension payment" [and] such a payment to the Taxpayer would not be eligible for a reduced rate of withholding tax under the Treaty… .

6 September 2013 T.I. 2013-0478241E5 ("U.K. Individual Savings Account"):

Although income earned in a UK Cash ISA is not subject to taxation in the U.K., under the Canadian Income Tax Act ("Act") Canadian residents ... must report their worldwide income, including income earned on investments held in the U.K., for Canadian tax purposes.  As such, the interest received or receivable in the year from the investments in a UK Cash ISA must be included in a Canadian resident's income tax return pursuant to paragraph 12(1)(c) of the Act.

CRA also indicated that neither Article 11 nor Article 17 of the Canada-UK Convention would apply to relieve taxation.  (Article 17 is equivalent to Art. XVIII of the Canada-US Convention.)

12 March 2013 T.I. 2013-0476351E5: A Roth IRA is not a registered plan under the ITA, but Article XVIII will generally apply to distributions to a Canadian resident individual out of a Roth IRA if the distribution would be excluded from income tax if paid to a US resident.

Under paragraph 7 of Article XVIII, a Canadian resident individual may also elect to defer taxation in Canada on any income accrued in a Roth IRA until a distribution is made from the plan.

30 January T.I. 2013 2012-0449621E5 F:  Respecting the payment of a Belgian pension to a Canadian resident, CRA stated (TaxInterpretations translation):

Thus, to the extent that the retirement pension of a recipient satisifes the conditions stated in paragraph 1 of Aricle 18 of the Convention and does not consititue a payment by virtue of social security legislation of Belgium, the sum received by the Canadian taxpayer is taxable in Canada and in Belgium....If, on the other hand, the sum is paid under social security legislation of Belgium, it will not be taxable except in Belgium.  The payment will be required to be included in the income statement of the Canadian taxpayer, but the taxpayer will benefit from a deduction in an equivalent amount under subaragraph 110(1)(f)(i).

17 October 2012 T.I. 2012-0438671E5:  Discussion of treatment of German social security pensions including link to discussion at www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/grmny2005-eng.html.  CRA states:

a recipient of a qualifying retroactive lump-sum payment exceeding $3,000 can ask the CRA to tax the parts (not including interest) received as a lump-sum payment as if they had received them in the years to which they relate using Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment. The CRA will apply this calculation to the parts that relate to years throughout which the taxpayer was resident in Canada, if the total of those parts is $3,000 or more (not including interest) and the result is better for the taxpayer.

25 June 2012 T.I. 2011-0398691E5: An individual who converts a traditional US Individual Retirement Account ("IRA") to a Roth IRA is allowed under the Code to spread the resulting income inclusion over the following two taxation years.

CRA confirmed that there is no such allowance under Canadian tax law, and the entire converted amount is treated as a distribution from the IRA and will be included in the year of the conversion, pursuant to s. 56(1)(a)(i)(C.1).  CRA stated:

Pursuant to paragraph 1 of Article XVIII of the Convention, amounts received from a traditional IRA by a Canadian resident may be taxed in Canada. However, as an exception, amounts that would be exempt from taxation in the U.S. if paid to a U.S. resident may not be taxed in Canada. In the case at hand, the 2010 conversion amount is not exempt from taxation in the U.S., as the taxation of this amount is simply being deferred. Consequently, the Convention does not apply to prevent the 2010 conversion amount from being taxed in Canada.

CRA noted, however, that "in many cases, Article XVIII of the Convention may apply to either defer or relieve taxation in Canada."  Income Tax Technical News, No. 43 describes CRA's position on Roth IRAs in more detail.

25 June 2012 T.I. 2011-0404071E5: It is unnecessary for a Canadian-resident individual to file an election under Art. XVIII(7) of the Canada-US Convention to defer recognition of income on investments in a US Individual Retirement Account because the Act already provides such deferral:

Under clause 56(1)(a)(i)(C.1) of the Act, an individual is required to include amounts under a foreign retirement arrangement in income only when the amounts are paid out of the plan.

(These remarks apply only to IRAs that are foreign retirement arrangements.  For the treatment of a Roth IRA, see Income Tax Technical News, No. 43.)

12 June 2012 T.I. 2012-0432281E5:  A 401(k) plan is considered a qualifying retirement plan as defined in Art. XVIII, para. 15 of the Canada-US Convention.  General discussion of how the Canadian RRSP rules are applied to a Canadian resident performing services for a US-resident employer, with the other requirements of Art. XVIII, para. 15 being satisfied.

24 April 1997 T.I. 970538: A payment under an unmatured RRSP is not considered to be a "pension" for purposes of paragraph 3 of Article 17 of the U.K. Convention because that amount will no longer fund any future entitlement under the RRSP.

20 June 1996 T.I. 961204: "As long as the amount of the pension arising in the U.S. would have been excluded from taxable income in the U.S. by a U.S. resident recipient, such amount would be exempt from taxation in Canada by a Canadian resident recipient. Consequently, it [is not required] that the Canadian resident recipient be a resident or former resident of the U.S ... before he or she can qualify, under paragraph 1 of Article XVIII of the [U.S.-Canada] Convention ...  ."

A taxpayer who receives a periodic pension from the International Monetary Fund should file a letter from the IMF annually with his or her T1 return.

29 April 1996 T.I. 961448 (C.T.O. "Part XIII - RRSP of Deceased Non-Resident"): Although an RRSP is a "pension" for purposes of Article XVIII of the Canada-U.S. Convention, funds paid out of an RRSP to the estate of a deceased U.S. annuitant would not qualify as "periodic pension payments" for purposes of paragraph 2 of Article XVIII. Accordingly, the reduced rate of 15% would not apply. The fact that the source of funds in the RRSP was dividends or interest would have no relevance.

1995 TEI Round Table, Q. 17 (Draft) (953051) (C.T.O. "Is a Retirement Compensation Arrangement a 'Pension' for Purposes of Canada-U.S.Treaty?"): "Payments from an RCA as that term is defined in subsection 248(1) of the Income Tax Act, would qualify as 'pensions' for purposes of the convention". However, whether such payments would be eligible for the reduced rate of 15% would depend on whether they qualified as "periodic pension payments" as defined in s. 5 of the Income Tax Conventions Interpretations Act. A payment from an RCA "would not constitute a 'periodic pension payment' where the 'payment is not one of a series of annual or more frequent payments to be made over the lifetime of the recipient or over a period of at least 10 years'."

20 October 1994 T.I. 941658 (C.T.O. "Is RRIF Payment to U.K. Resident a Pension? (U4-100-17)"): A payment out of a RRIF is considered to be a payment under a retirement plan referred to in the definition of pension in Article 17, paragraph 3, of the Canada U.K.-Convention. If the payment from the RRIF qualifies as a periodic pension payment as defined in s. 5 of the Income Tax Conventions Interpretation Act, it would fall under the meaning of pension in Article 17 and would be exempt from Canadian non-resident withholding taxes pursuant to paragraph 1 of Article 17.

22 September 1994 T.I. 941180 (C.T.O. "Retiring Allowance Paid to U.K. Resident (U4-100-17)"): A retiring allowance paid to a U.K. resident in respect of his wrongful dismissal by a Canadian company would not be exempt under Article 17, Article 15 or any other Article of the Canada-U.K. Convention, given that it does not qualify as a "pension" nor as "salaries, wages and similar remuneration".

31 March 1994 T.I. 933999 (C.T.O. "RRIF - Periodic Pension Payment - U.S. Convention (U5-100-18)"): If a payment out of a RRIF qualifies as a "periodic pension payment" as defined under the Income Tax Conventions Interpretation Act, and it is paid to a resident of the U.S., the Canadian non-resident withholding tax on such payment will be 15% of the gross amount of the RRIF payment pursuant to paragraph 2(a) of Article 18 of the U.S. Convention.

24 March 1994 T.I. 933575 (C.T.O. "RRIF Paid to UK Resident - Pension & Annuity (U4-100-17)"): Notwithstanding the definition for "annuity" found in s. 5 of the Income Tax Conventions Interpretation Act, a payment out of a RRIF which qualifies as a "periodic pension payment" under the ITCIA which is paid to a resident of the UK, falls under the term "pension" in paragraph 3 of Article XVII of the UK Convention.

93 C.R. - Q. 32: The definition of "pensions" includes a U.S. IRA.

7 February 1994 T.I. 940135 (C.T.O. " U.S. Pension Received by Canadian (4093-U5-100-18)"): In order for RC to grant treaty-exemption for the portion of U.S. pension benefits paid to a Canadian resident that represent a return of premiums, it will require a breakdown from the plan. Before RC will grant treaty-exemption on any other portion of the pension benefit, it will require a letter from the U.S. tax authorities confirming that such other portion will be exempt from Canadian tax in accordance with paragraph 1 of Article XVIII of the U.S. Convention.

27 February 1992 T.I. (Tax Window, No. 17, p. 18, ¶1767): A retiring allowance is not periodic pension income and therefore is not eligible for rate reduction under Article XVIII, paragraph 2 of the Canada-U.S. Convention.

20 November 1991 T.I. (Tax Window, No. 13, p. 8, ¶1601): If a transfer out of a U.S. pension plan directly into an IRA would not have resulted in the amount being taxed in the U.S. had the person been resident there at the time of the transfer, the exemption of Article XVIII of the Canada-U.S. Convention will apply.

7 October 1991 T.I. (Tax Window, No. 10, p. 22, ¶1500): The payment of the "minimum amount" under a RRIF to a U.S.-resident annuitant will be subject to withholding at the rate of 15% as limited by Article XVIII of the Canada-U.S. Convention. However, where the annuitant requests a payment in excess of the minimum amount for the year, the excess payment will not qualify as a periodic pension payment or will be subject to withholding tax of 25% pursuant to s. 212(1)(q) of the Act.

2 August 1991 T.I. (Tax Window, No. 8, p. 23, ¶1420): Alimony or maintenance paid by a person who is a U.S. resident at the time of the payment will be considered to arise in the U.S. for purposes of paragraph 6 of Article XVIII of the Canada-U.S. Convention even if the payments were made pursuant to an order of a Canadian court made while the payer was a Canadian resident.

6 March 1991 Memorandum (Tax Window, No. 1, p. 18, ¶1148): The rate reduction under Article XVIII of the U.S. Convention applies only to annuity payments made on a periodic basis, and not to a lump-sum payment arising on the surrender or partial surrender of an annuity.

88 C.R. - Q.1: Withdrawals from RRSP's are pensions for purposes of Article XVIII of the U.S. Convention. However, the reduced rate of 15% only applies where withdrawals from an RRSP are periodic, i.e., a series of payments for providing retirement income for the greater part of the recipient's life.

88 C.R. - Q.5: If a Canadian resident is permitted under the Code to roll a lump sum payment received out of a U.S. pension fund into an IRA, a deduction in Canada will be permitted pursuant to s. 110(1)(f) to recognize the deferral permitted under Article XVIII of the U.S. Convention.

Articles

Jim Kahane, Uros Karadzic, and Simon Létourneau-Laroche, "A Fresh Look at Retirement Compensation Arrangement: A Flexible Vehicle for Retirement Planning," Canadian Tax Journal (2013) 61:2, 479 – 502.

Retirement compensation arrangement as pension (p. 493)

[U]nder the model convention, payments from an RCA are likely to be considered a pension rather than income from employment.

From a Canadian perspective, pursuant to the Income Tax Conventions Interpretation Act (ITCIA), RCAs are considered to be pension vehicles if "pension is not otherwise defined in the tax convention concluded between Canada and a foreign country.

Advantage if OECD Model followed (p. 493)

Article 18 of the model convention provides that pension benefits are taxable only in the state of residence of the beneficiary.

If the foreign country of residence applies the OECD position, no Canadian taxes will be withheld at source on a payment from an RCA to a non-resident beneficiary because such income will not be taxable in Canada.  To the extent that the effective tax rate in the beneficiary's country of residence is significantly lower than the rate that would otherwise apply to a Canadian resident, there are tax-saving opportunities in situations where the beneficiary is expecting to leave Canada.

Advantage if RCA payments instead subject to Cdn. withholding but a local FTC is required (pp. 494-5)

[T]he Canada-France treaty provides that pension benefits are taxable only in the state in which they arise. [fn 79: Article 18(1)… .]  In this situation, a French resident who was employed in France and is a beneficiary of a Canadian RCA would be subject only to Canadian withholding tax, at the rate of 25 percent, in respect of the payment of retirement benefits.  Pursuant to the treaty, France would allow a full foreign tax credit equivalent to the French taxes otherwise payable on this income.  [fn 80: Article 23(2)(a)(i)… .]  As a result, the tax rate on the payment of the retirement benefit would be limited to 25 percent, … This situation is, of course, possible only to the extent that the non-resident employee is a beneficiary of an RCA that is maintained primarily for the benefit of Canadian residents in respect of services rendered in Canada.

Kevyn Nightingale and David Turchen, "The US Tax Implications of a Tax-Free Savings Account", CCH Tax Topics, No. 2146, April 25, 2013, p.1, at 2:

Most of the larger accounting firms are taking the conservative position that a TFSA is not treaty-protected....

After reviewing the other requirements of Art. XVIII, para. 7 of the Canada-U.S. Convention in its application to a U.S. citizen or resident who has a TFSA, they state (at pp. 2-3):

The sole remaining question is whether a TFSA is operated "exclusively to provide pension … benefits".  We would argue that it is, in essentially the same way that a registered retirement savings plan ("RRSP") is.

"Exclusively" is a bit of a loose term:

  • RRSP funds can be used for home purchase [fn. 19: ITA, s. 146.01.] and education [fn. 20: ITA, s. 146.02.] purposes
  • IRA funds can be directly used for charitable [fn. 21: IRC, s. 408(d)(8).] and medical purposes. [fn. 22: IRC, s. 408(d)(9).]

Yet, RRSPs and IRAs clearly qualify.

A TFSA is specifically designed to assist with savings.  The investments permitted are the same as for an RRSP.

Retirement is one of the listed objectives – generally a major objective. [fn. 23:  2008 Budget, Chapter 3 and Annex 4.]

And of course, early withdrawals are permitted, albeit with tax consequences.

Some say that the absence of a withdrawal penalty for a TFSA should impact its status under the treaty, because this diminishes the likelihood of retaining funds to retirement.  However, there is no early withdrawal penalty for a Canadian RRSP.  A disabled taxpayer, [fn. 24: IRC, s. 72(t)(2)(A)(iii).] or one affected by certain hurricanes, [fn. 25: IRC, s. 1400Q(a)(1).] can withdraw IRA funds without the early withdrawal tax. [fn. 26: IRC, s. 72(t).].…

Conclusion

A TFSA should be treaty-protected in the same way as a Roth IRA.

Faizal Valli, "Implications of Canadians Transferring a U.S. Retirement Plan to Canada," Taxation of Executive Compensation and Retirement, Vol. XV, No. 2, 2011, p. 930.

Finley, "Payments Out of a RCA May Not Be Eligible for Reduced Withholding Tax", Taxation of Executive Compensation and Retirement, September 1990, p. 327: RC has accepted that an RCA which has been established in order to fund supplemental pension benefits for an employee is a "superannuation, pension or retirement plan" for purposes of Article XVIII of the U.S. Convention; however, RC will insist on the benefits being available as a result of retirement, and not as a consequence of loss of employment.