26 August 2004 Internal T.I. 2002-0142171I7 - Superanuation or pension benefit

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: Is a resident of Canada who is in receipt of a U.S. Civil Service pension taxable on the receipt?

Position: To be determined by tax treatment if taxpayer was a resident of the U.S.

Reasons: Pursuant to paragraph 1 of Article 18 of the Canada-U.S. Income Tax Convention, the pension is not subject to Canadian income tax if it would be exempt from U.S. income tax if the recipient had received it while resident in the U.S.

			August 26, 2004

	INTERNATIONAL TAX DIRECTORATE	HEAD OFFICE
	Non-resident Operations Division	Income Tax Rulings  Returns Processing & Compliance	  Directorate
R. Albert
	Attention:  Laurie Watters
			2002-014217

Taxability of U.S. Civil Service Pension

This is in reply to your facsimile dated May 22, 2002 regarding the taxability of a U.S. civil service pension being received by a resident of Canada.

Facts

1) The taxpayer was an employee with the XXXXXXXXXX from XXXXXXXXXX until she retired in XXXXXXXXXX (from the August 21, 2001 memo submitted with the request, author XXXXXXXXXX).

2) Under U.S. law, the taxpayer is a non-resident alien who performed all employment services for the U.S. government outside of the U.S. (from the August 21, 2001 memo submitted with the request, author XXXXXXXXXX).

We then have two conflicting statements in the incoming documents concerning taxation of the amount in the U.S. based on comments on pages 9, 10 and 11 of the IRS Publication 721 "Tax Guide to U.S. Civil Service Retirement Benefits":

3)a) "...the pension that [the taxpayer] receives from the U.S. Civil Service Retirement System ("CSRS") is not taxable in the U.S." (from the August 21, 2001 memo submitted with the request, author XXXXXXXXXX ).

3)b) "...no exemption exists as the [taxpayer] would be subject to tax in the United States if the [taxpayer] were resident" (from the January 23, 2002 memo submitted with the request, author XXXXXXXXXX ).

As pages 9, 10 and 11 of the IRS Publication 721 "Tax Guide to U.S. Civil Service Retirement Benefits" were not included with the incoming, we obtained a copy of this publication "For use in preparing 2001 Returns".

Your Query

Is the pension subject to income tax in Canada?

Our Comments

Paragraph 1 of Article 18 of the Canada-U.S. Income Tax Convention ("Convention") states:

Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.

Consequently, if a CSRS pension would be exempt from taxation in the U.S. if the recipient taxpayer were a resident of the U.S., the pension income should not be subject to income tax in Canada. Although the net effect is that such pension should not be subject to tax in Canada, the taxpayer should report the CSRS pension income on their Canadian T1 pursuant to paragraph 56(1)(a) of the Income Tax Act ("Act"). The taxpayer would then entitled to a deduction under subparagraph 110(1)(f)(i) for treaty-exempt income to the extent that some or all of the CSRS pension income would be excluded from taxable income for U.S. income tax purposes if the taxpayer was receiving the pension while resident in the U.S.

If an entire CSRS pension would not be exempt from taxation in the U.S. if the recipient taxpayer was a resident of the U.S., some portion of the pension would likely be exempt as the U.S. would not tax its residents on the portion of a pension payment that is a refund of the premiums of a beneficiary (i.e., a return of capital). Accordingly, the portion of a CSRS pension payment that is a refund of premiums is deductible in computing taxable income in Canada as treaty-exempt income.

We obtained the views of the IRS. They confirmed that a U.S. resident receiving CSRS pension payments based solely on services performed outside the U.S. is subject to U.S. income tax on the portion that is other than a return of contributions that were not deductible when contributed.

From the above, the pension payments would be taxable in Canada only to the extent that they relate to income earned by the plan on contributions. In order for the Canada Revenue Agency to grant treaty-exemption for the portion of the CSRS pension benefits that represent a return of contributions, we would require a breakdown from the plan.

Additional Comments

We have considered pages 9, 10 and 11 of the IRS publication referred to above as well as other comments in that publication. The Introduction confirms our comments above regarding the refund of premiums where it states: "Part of the annuity benefits you receive is a tax-free recovery of your contribution to the CSRS...". The Introduction then states: "The rest of your benefits are taxable". The contributions are generally referred to as the retiree's cost of their annuity. However, pages 10 and 11 include special rules for nonresident alien federal employees who perform services outside the U.S. and to nonresident alien retirees and specifically stated is the following: "Your contributions to the retirement plan (your cost) also include the government's contributions to the plan to a certain extent. You include government contributions that would not have been taxable to you at the time they were contributed if they had been paid directly to you. For example, government contributions would not have been taxable to you if, at the time made, your services were performed outside the United States. Thus, your cost is increased by government contributions that you would have excluded as income from foreign services if you have received them directly as wages. This reduces the benefits that you, or your beneficiary, must include in income." This suggests that all contributions to the CSRS, whether made personally or by the government, would be received tax-free.

Roberta Albert, CA
Manager
Deferred Income Plans
Financial Industries Division
Income Tax Ruling Directorate