30 April 1997 External T.I. 9706405 - U.K. NATIONAL INSURANCE BENEFITS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Why is pension income from foreign plan taxable when contributions to plan were not tax-deductible.

Position:

Assuming the U.K. National Insurance is a "pension plan" to which employer contributions were made, it is an EBP or, after 1987 (assuming no material alterations between Oct. 8, 1986 and Dec. 31, 1987), a "resident's arrangement" RCA; alternatively, it is a social security arrangement. Contributions by Canadian-resident employee to any of these arrangements are not tax-deductible. The return of contributions from an EBP or RCA is, respectively, exempt from taxation under 6(1)(g)(ii) or deductible under paragraph 60(t); the return of contributions from a social security arrangement are taxable in full as "pension" pursuant to Article 17 of Canada-U.K. Treaty and paragraph 56(1)(a)(i) of the Act.

Reasons:

Only tax break with respect to EBPs or RCAs relates to a return of employee contributions (XXXXXXXXXX); U.K. social security income is taxable in full in Canada.

XXXXXXXXXX 970640

April 30, 1997

Dear XXXXXXXXXX:

Re: Payments Out of U.K. National Insurance

This is in reply to your letter of February 27, 1997, in which you ask us to comment on the requirement to include in income amounts received from the United Kingdom National Insurance. You refer to the requirement to include the amount on Line 115 of the T1 Income Tax Return and point out that the amounts you paid to the arrangement were voluntary and made with after-tax dollars.

Since we do not have enough information concerning the U.K. National Insurance we are unable to confirm that it is a pension plan for purposes of the Income Tax Act or a social security arrangement. The following comments, therefore, address both possibilities.

Although the Income Tax Act generally provides that amounts contributed to certain plans and arrangements which are tax-deductible are included in income when received, it is not always the case that contributions for which no deduction is available are received tax-free. Please note the comments in paragraph 4 of the enclosed Interpretation Bulletin IT-499R ("Superannuation or Pension Benefits").

FOREIGN PENSION PLAN

In general, amounts paid by a Canadian resident to a foreign pension plan are not deductible from income in the year paid although a portion of the amount may be exempt from tax or deductible from income under the Income Tax Act when received by a Canadian resident.

A foreign pension plan includes a plan to which an employer, and sometimes the employee, make contributions and which is established to provide income after retirement and usually for life. Generally for periods before 1988 such a plan is considered to be an "employee benefit plan" ("EBP") and starting in 1988 may continue to be an EBP or be deemed to be a "resident's arrangement" (in other words, a retirement compensation arrangement ("RCA") with respect to the Canadian resident's benefits) under the Income Tax Act. There is no provision for a tax deduction under the Income Tax Act with respect to contributions to an EBP or foreign-based RCA.

The only exemption from income tax for income received out of a foreign pension plan which is an EBP is with respect to a return of the employee contribution portion of pension benefits where the contributions are attributable to services rendered by the employee in a period when the employee was resident in Canada. A deduction is permitted with respect to a return of the employee's non-deductible contributions to a foreign pension plan which is an RCA where such contributions were made in respect of services rendered by the employee when the employee was resident in Canada and the services were primarily services rendered in Canada or services rendered in connection with a business carried on by the employer in Canada.

The balance of the amounts received out of an EBP or RCA (i.e., the employer contributions and earnings on both the employee and employer contributions) are taxable in full upon receipt by a Canadian resident.

FOREIGN SOCIAL SECURITY

If the U.K. National Insurance is a foreign social security arrangement, there is no provision under the Income Tax Act for tax-deductible contributions to be made to it. In accordance with paragraphs 1 and 3 of Article 17 of the Canada-U.K. Income Tax Convention, such social security income is treated as "pension" and is taxable in the country in which the recipient is resident. Under the Income Tax Act, pension income is taxable in full upon receipt.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosures