Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: How does a Canadian resident Taxpayer treat payments received for a German social security pension?
Position: The Taxpayer is required to include the whole lump-sum pension payment in their taxable income in the year of receipt. However, if the principal portion of the pension benefit exceeds $3,000, the Taxpayer can request that the CRA tax the parts (not including interest) for the previous years as if they received them in those years using Form T1198.
Reasons: see below.
October 17, 2012
Re: Treatment of lump-sum German social security pension payment
This letter is in response to your request regarding the proper treatment of a lump-sum arrears payment received by a Canadian resident in respect of German pension benefits.
The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
In general, all pension benefits received including foreign pension benefits are required to be included in income in accordance with paragraph 56(1)(a) of the Income Tax Act (the "Act"). In some cases, all or a portion of the foreign pension may be exempt from Canadian tax by virtue of a provision contained in a tax treaty that Canada has with another country. Subparagraph 110(1)(f)(i) of the Act provides for a deduction from income in respect of any such non-taxable foreign pension amount.
In the case of Germany, for the years up to and including 2002, German pensions were not taxable in Canada based on Article 18 of the prior Canada-Federal Republic of Germany Tax Agreement (the "old Treaty").
For the 2003 and subsequent years, the tax treatment for German social security pensions ("German pension") was changed as a result of paragraph 3(c) of Article 18 of the new Canada-Federal Republic of Germany Tax Agreement (the "new Treaty"). This provision provides that the same amount of German pension will be included in the income of a resident of Canada if this same amount would have been included in the individual's income had they been a resident of Germany.
In relation to the new Treaty, the Canada Revenue Agency ("CRA") provided a news release titled "Change to the taxation of social security pensions received from Germany by a resident of Canada - 2003 and 2004" which explains the changes to the taxability of social security pensions that Canadian residents receive from Germany and its application for the 2003 and 2004 taxation years. This news release can be found on the CRA website at http://www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/grmny-eng.html.
Due to a fundamental reform of the taxation of retirement income in Germany, the portion of German pension subject to tax in Germany for a German resident was changed. As a result of this, the portion of German pension that is subject to tax in Canada also changed for the 2005 and subsequent years. The CRA news release titled "Change to the taxation of social security pensions received from Germany by a resident of Canada - BEGINNING 2005" explains this and explains how the portion of the German pension that is subject to tax in Canada for the 2005 and subsequent years should be determined. This news release can be found on the CRA website at http://www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/grmny2005-eng.html.
With respect to a lump-sum arrears pension payment, a Canadian resident is required to include the whole lump-sum pension payment in their taxable income in the year of receipt subject to the new Treaty. However, 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.
Although Form T1198 states that the payer of the lump-sum payment should complete the form, there is no legislated requirement in the Act or in the Income Tax Regulations that requires a payor to issue a Form T1198. However, if you are unable to determine the correct breakdown of principal amounts and interest, you may need to contact the issuer of the German pension benefit to assist you in completing the T1198 form. Once you have a completed Form T1198, we recommend that you contact the nearest Tax Services Office and request a meeting so they can assist you with the proper treatment of your specific situation.
Based on the information provided, the Canadian resident calculated the taxable percentage of their German pension for their XXXXXXXXXX and XXXXXXXXXX tax returns based on the understanding that the started date for receiving their German pension was in XXXXXXXXXX. The Canadian resident should ensure the taxable percentage of their German pension is corrected to take into account the new information received related to the lump-sum payment. A notice is issued by the German social security administration when a pension is granted. On the first page of a typical notice, you should find this sentence: "Die Rente beginnt am [xxx date]." (The pension starts on [xxx date]). This is the date that the Canadian resident should use to calculate the non-taxable portion of the German pensions received as explained in the CRA news releases noted above.
A foreign tax credit would also be available in respect of German pension income earned by a Canadian resident which has been subject to tax by the German Taxing Authority. To reduce or eliminate the double taxation of such income, a resident of Canada is entitled to claim any tax paid to the German Tax Authority as a foreign tax credit against the tax otherwise payable in Canada.
We trust these comments will be of some assistance.
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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