3 August 1999 External T.I. 9911675 - UK PENSION RECEIPTS

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 document1 bien qu'exact au moment émis,peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Are certain payments made out of a UK pension plan taxable in Canada?

Position:

The specific amounts are likely taxable in Canada. However we can only provide general information on the topic.

Reasons:

The situation is a factual one relating to payments that the recipient started to receive in 1998. The file should be considered by the individual recipient's Tax Services Office. We could not provide a ruling on the matter as requested but provide general comments which we also copied to the TSO.

XXXXXXXXXX						991167
W. C. Harding

Attention: XXXXXXXXXX

August 3,1999

Dear Sirs:

Re: Benefits paid out of the United Kingdom Merchant Navv Officers Pension Fund

This is in reply to your facsimile of May 3, 1999, in which you asked for a ruling on the taxability of certain amounts paid out of the above noted pension Plan.

Confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. This Directorate may provide technical interpretation concerning the provisions of the Income Tax Act (the "Act") and Regulations (the "Regulations") but not with respect to specific, factual or hypothetical transactions. However, we can provide the following general comments which may or may not apply to the specifics of your situation. Please note that these are not binding on the Department.

We understand that your client was a member of the United Kingdom merchant navy and as a consequence, became entitled in 1998 to receive a pension payable in one of two optional forms. The first option provided for a pension payment of, £XXXXXXXXXX per annum while the second option, as chosen by your client, provided an initial amount of £XXXXXXXXXX followed by an annual pension of £XXXXXXXXXX. We also understand that the initial amount paid under the second option is tax free in the United Kingdom.

As a general rule, an individual must include any pension benefits received in a year in his or her income for the year in which it is received. However, there are a number of exceptions to this rule. One specific exception permits the exclusion of any pension income received from certain foreign countries on account of any disability or death arising out of service in World War I or II. This exclusion is explained in detail in the enclosed Interpretation Bulletin 1T397R and the special release thereto. However, we did not note any indication in the material provided by you, that any portion of your client's pension entitlement was payable as a consequence of death or disability arising out of war service with the United Kingdom. Accordingly the exception would not appear to apply.

A further exception to the general rule may also arise as a result of an exclusion provided in an income tax convention between Canada and another country. However, in the case of the Canada - United Kingdom Income Tax Convention, generally all amounts received out of a United Kingdom pension plan by a Canadian resident may be taxed in Canada in accordance with the provisions of the Act.. In particular, Article 17 of the Canada - United Kingdom Tax Convention provides as follows:

"Article 17 - Pensions and Annuities

1 Pensions arising in a Contracting State [the United Kingdom] and paid to a resident of the other Contracting State [Canada]who is the beneficial owner thereof shall be taxable only in that other state [Canada].

3 For the purposes of this Convention, the term "pension" includes any payment under a superannuation, pension or retirement plan, Armed Forces retirement pay, war veterans pensions and allowances, and any payment under a sickness, accident or disability plan as well as any payment made under the social security legislation in a Contracting State, but does not include any payment under a superannuation, pension or retirement plan in settlement of all future entitlements under such a plan or any payment under an income-averaging annuity contract.

To summarize, a single amount paid out of a United Kingdom pension plan will be taxable as "pension" in Canada unless it is in settlement of all future benefits under the plan. Accordingly, where a person has elected to receive an initial lump sum payment but not one that was in settlement of all future benefits, the amount will be "pension" pursuant to section 3 of Article 17 of the Convention and may be taxed by Canada pursuant to section 56 of the Act. In this respect, it is irrelevant that the amount may be received tax free by a recipient who is resident in the United Kingdom.

The continuing annual benefits payable to your client will also be "pension" payments as defined under the convention and may also be taxed by Canada. However it should be noted that section 1 of Article 17 also provides that the United Kingdom may not tax any pension benefits paid to a beneficial owner who is resident in Canada. Nevertheless it appears that the United Kingdom pension administrator did, in fact, withhold tax from the annual payments. If this is the case, the tax withheld may be inappropriate and your client may wish to review this situation with the pension administrator.

We trust these comments will be of assistance.

Yours truly,

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