26 June 2000 External T.I. 1999-0008365 F - Disability insurance from NR payors

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: (1) Whether income loss disability payments under a personal insurance policy from a source in Switzerland must be included in income in Canada.

(2) Whether disability payments under a Swiss government pension scheme similar to Canada's Old Age Security must be included in income in Canada.

(3) Whether Canada can tax payments in (2) above under the Canada - Switzerland tax convention.

Position: (1) No (2) Yes (3) Yes

Reasons: (1) Treatment of similar Canadian source payments.

(2) Question of fact. Likely is pension income under sub-paragraph

56(1)(a)(i).

(3) Canada retains the right to tax annuity and pensions under Article 18 of the Canada - Switzerland tax convention.

XXXXXXXXXX 1999-000836
M. LeBlond
June 26, 2000

Dear Sir:

Re: Taxation of certain payments from sources in Switzerland

We are writing in reply to your letter of October 1, 1999, wherein you requested our comments on whether the disability payments you receive from two sources in Switzerland would be subject to income tax if you were a resident of Canada, under Canada's Income Tax Act (R.S.C. 1985, 5th Supp., c. 1, as amended) (herein the "Act"). We apologize for the delay in our response.

Your letter and documents indicate that you were born in XXXXXXXXXX, Canada, where you lived until age XXXXXXXXXX at which time you moved to Europe where you have been residing for the past XXXXXXXXXX years. Sometime in XXXXXXXXXX, you suffered a work related injury while employed by XXXXXXXXXX which has diminished your earning capacity. As a result, you have been receiving monthly disability payments from both "Assurance invalidité fédérale" (herein "AI") and "XXXXXXXXXX". The amount of the XXXXXXXXXX benefits is based on the income you earned the year prior to the injury.

In addition, you informed us, on May 24, 2000, that AI is a Swiss government disability pension similar to Canada's Old Age Pension, to which you and your employer made premium payments. Also according to you, all Swiss residents are required to carry injury insurance, at their own cost, and that XXXXXXXXXX is the private insurer that has been providing you this insurance. You explained that you include the AI and XXXXXXXXXX payments in the computation of your income for Swiss income tax purposes but that you do not pay any tax because of your low income level. Furthermore, you mentioned that XXXXXXXXXX is a private company.

Our Comments

As explained in Information Circular 70-6R3 (a copy of which is attached), this Directorate can only provide a binding opinion concerning the tax consequences associated with specific proposed transactions in the form of an advance income tax ruling. Consequently, we can only provide you with the following general comments.

In Canada, when an insurance policy provides a person with a benefit for loss of income earning capacity such as an income disability insurance and the premium on the policy is a non tax deductible personal living expense, the benefit received by the person is generally not considered to be income subject to tax.

Since your XXXXXXXXXX disability benefits appear to be provided under an income disability insurance policy on which you have paid all the premiums they would not, generally, be considered income subject to tax as such payments from a Canadian source would not be.

Generally, benefits under a plan or arrangement providing determinable periodical payments by a government, a company or an employer to a person who has, by reason of age or disability, ceased to be employed are considered superannuation or pension benefits under the Act.

The determination of whether an amount received by a person constitutes a pension benefit is a question of fact that can only be determined after a review of all of the relevant facts. Generally, this would require ascertaining the objective of the arrangement or the plan and analyzing its terms.

If after a review of the facts it is established that an amount represents a superannuation or pension benefit, the amount would be included in the recipient's income under subparagraph 56(1)(a)(i) of the Act.

In a situation such as yours, where you may receive pension benefits out of a foreign pension plan (AI) while residing in Canada, your pension benefits would be subject to tax in the same way as a pension received from a source in Canada under subparagraph 56(1)(a)(i) of the Act unless exempted by the provisions of a tax treaty.

Generally, the Convention between Canada and Switzerland for the avoidance of double taxation with respect to taxes on income and on capital (herein the "Convention") does not exempt a resident of Canada from being taxed on pensions or annuities arising in Switzerland. In fact, under section (1) of Article 18 of the Convention both Canada and Switzerland have the right to impose an income tax on pensions and annuities.

There is an exception to this rule, under section (2) of Article 18 of the Convention, which gives Switzerland sole taxing right. This exemption does not appear to apply in your case since the AI benefits were not paid by, or out of funds created by, Switzerland or a political subdivision or a local authority thereof, in respect of services rendered to Switzerland or subdivision or local authority thereof in the discharge of functions of a governmental nature.

However, according to section (1) of Article 18 of the Convention, Switzerland may limit its tax to 15 per cent of the gross amount of the periodic pension or annuity payments to a resident of Canada. Only the Swiss tax authorities can confirm what rate of tax would apply, how the tax would be collected and if there is any relief available under the Swiss federal tax law.

Note that a Canadian resident may, in certain circumstances, deduct from his or her Canadian tax otherwise payable, a foreign tax credit and a disability tax credit.

The foreign tax credit may be claimed in respect of income or profits tax paid to a foreign country by the Canadian resident pursuant to subsection 126(1) of the Act. In general terms, this credit is limited to the lesser of the income and profits tax paid to the particular foreign country and the Canadian tax otherwise payable for the year on income from sources within that particular country. A tax that is specifically identified as being subject to the provisions of a comprehensive income tax treaty between Canada and a particular country automatically qualifies as an income or profits tax. However, the amount of tax paid which will be refunded to the taxpayer is not considered to be tax paid for the year.

The disability tax credit is a non-refundable tax credit that reduces the amount of income tax that may be owed by people with disabilities or the people who support them pursuant to subsection 118.3(1) of the Act. A person is eligible to apply for the disability tax credit when he or she suffers of a severe and prolonged mental or physical impairment such that the person is markedly restricted in his or her ability to perform basic activity of daily living.

For more information on pension benefits and the foreign tax credit you may wish to consult Canada Customs and Revenue Agency's (formally Revenue Canada) Interpretation Bulletin IT-499R and Interpretation Bulletin IT-270R2, respectively, on our internet web site http://www.ccra-drc.gc.ca/formspubs/menu-e.html. On this site,

you will also be able to access other government of Canada publications such as "Moving Back to Canada" [RC4105(E) Rev. 99 G251] and "Information concerning people with disabilities 1999" [RC4064].

We trust that our comments will be of assistance.

Yours truly,

Maurice Bisson, CGA
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Enc.