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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Request for comments on the taxability of specific types of pensions sourced in the UK.
Position: Provided general commentary.
Reasons: It is a question of fact whether the payments are pension payments.
W. C. Harding
February 25, 2003
Re: United Kingdom (U.K.) Pension Income
This is in reply to your letter of August 20, 2002, in which you requested clarification of whether certain payments your client received out of a U.K. pension plan would be taxable.
This Directorate may only provide written confirmation of the tax implications inherent in particular situations when the transactions involved are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Canada Customs and Revenue Agency ("CCRA") Information Circular 70-6R5 dated May 17, 2002. Questions concerning completed transactions should be addressed to your local tax services office. Accordingly, while we cannot provide you with specific answers to your inquiry, we can provide the following comments, which are general in nature and are not binding on the CCRA.
Based on the information you provided with your letter, and on resources available on the internet, the payment your client received appears to be related to a distribution of funds being made in respect of a U.K. pension arrangement. XXXXXXXXXX. As a result, approximately XXXXXXXXXX was paid to the administrators of the Plans for distribution to, or on behalf of, eligible members and former members of the Plans. Finally, we understand that significant efforts were undertaken to determine what portion or share of the funds should be paid to each eligible member and that these payments have or are now being processed. Accordingly, we presume that the amount your client received in XXXXXXXXXX was all or a portion of his or her share of the payment.
In your correspondence, you note that the amount your client received was paid out of a pension plan that was not taxable in the U.K. and that the payment might not be taxable had your client been a resident of the U.K. XXXXXXXXXX Accordingly, although we cannot conclude with certainty from the information at hand, in our view, the amount received is likely a pension payment as defined in the Canada-U.K. Income Tax Convention (the " Convention") or for purposes of the Income Tax Act (the "Act").
Where a resident of Canada receives an amount out of a U.K. plan that qualifies as a pension plan for purposes of the Act, the full amount received, before withholding taxes, is taxable under subparagraph 56(1)(a)(i) of the Act unless a specific provision of the Act or the Convention applies to exclude the amount. However, there is no provision in the Act or in the Convention, which will exempt from Canadian income tax that portion of the payment that would have been exempt from U.K. income tax. In particular, paragraph 1 of Article 17 of the Convention provides that pensions arising in a contracting state (i.e., the U.K.) and paid to a resident of the other contracting state (i.e., Canada) who is the beneficial owner thereof shall be taxable only in that other state (i.e., Canada). However, paragraph 3 of the Convention provides that, for the purposes of the 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".
Accordingly, where the amount is paid in respect of a U.K. pension scheme, it is immaterial whether or not the amount would be taxable had the recipient been a resident of the U.K at the time the amount was received. The full amount received, before withholding taxes, is taxable under subparagraph 56(1)(a)(i) of the Act and should be reported in Canadian currency on the taxpayer's T1 tax return using the particular exchange rate in effect at the time the amount was received unless the payment represents a lump sum payment in satisfaction of all of the recipient's future entitlements under the scheme.
While you have noted that the amount of the payment was not subject to taxation in the U.K., in situations where a U.K. plan administrator appropriately withholds U.K. taxes, for Canadian income tax purposes, the taxes are considered to be non-business taxes paid to the U.K. Consequently, an individual may be entitled to claim a foreign tax credit with respect to the taxes withheld. In basic terms, the foreign tax credit is computed as the lesser of the foreign taxes paid and an amount that is approximately equal to the taxes the resident of Canada would otherwise pay in respect of the payment. Interpretation Bulletin IT-270R2 Foreign Tax Credit provides the CCRA's general views on the computation of the foreign tax credit. This bulletin is available from your local tax services office or on the internet at: http://www.ccra-adrc.gc.ca/E/pub/tp/it270r2/it270r2-e.html.
In the event that an individual is not able to claim a foreign tax credit for the full amount of the withholding taxes, the individual may be allowed to claim a deduction under subsection 20(12) of the Act for an amount equal to the amount by which the withholding taxes exceed the foreign tax credit claimed. Interpretation Bulletin IT-506 Foreign Income Taxes as a Deduction From Income (http://www.ccra-adrc.gc.ca/E/pub/tp/it506/it506-e.html) provides the CCRA's general views with respect to the deductibility of foreign income taxes.
We trust that these comments will be of assistance to you.
Roberta Albert, CA
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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