19 February 2003 External T.I. 2002-0168355 - FOREIGN 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 CCRA.

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

Principal Issues:

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.

XXXXXXXXXX 2002-016835
W. C. Harding
February 19, 2003

Dear XXXXXXXXXX:

Re: United Kingdom (U.K.) Pension Income

This is in reply to your letter of October 15, 2002, in which you requested clarification of whether certain pension payments that you may receive would be taxable. Both pensions relate to injuries received in XXXXXXXXXX. You indicate that one of the pensions is an Ill Health pension which is taxable in the U.K., while the second is an Injury on Duty pension which is non-taxable in the U.K.

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. Accordingly, we cannot provide you with specific answers to your inquiry at this time. However, we can provide the following comments, which are general in nature and are not binding on the CCRA.

In general, for Canadian tax purposes, an arrangement is a pension plan if contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee or, in some cases, where amounts have been contributed by a government. Where a resident of Canada receives an amount out of a U.K. plan that qualifies as a pension plan for purposes of the Income Tax Act (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 Canada-U.K. Income Tax Convention (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 had the Canadian resident received the payment while a resident of the U.K. This is in contrast to, say, the Canada-U.S. Income Tax Convention paragraph 1 of Article 18 of which specifies that:

"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."

Accordingly, based on the information you provided it would appear that the payments from both plans should be reported in Canadian currency on your T1 tax return using the particular exchange rate in effect at the time an amount is received.

We cannot advise you on the taxation of your pensions by the U.K. as this would require an interpretation of the laws of the U.K., and it is outside this Directorate's mandate to provide opinions regarding foreign domestic laws. Accordingly, you may wish to discuss the taxation of your pensions by the U.K. with the appropriate authorities in the U.K. However, we can note that while pension payments sourced in the U.K. may be subject to taxation in accordance with relevant U.K. legislation, the taxation by the U.K. is subject to the provisions of the Convention where the amount is paid to a Canadian resident. In this respect, we note that Article XVII of the Convention provides, in general terms, that pension payments arising in the U.K. that are paid to a resident of Canada will only be taxable by Canada. Furthermore, for purposes of the Convention, the term "pension" is defined to include 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 of the United Kingdom, but does not include any payment under a superannuation, pension or retirement plan in settlement of all future entitlements under such a plan. Accordingly, assuming that your plans are pension plans for the purposes of the Convention and that any payments you receive under either of your plans is not in settlement of all your future entitlements under that plan, there should be no foreign tax withheld by the U.K. and there should be no need to consider the possible application of a foreign tax credit.

However, for Canadian income tax purposes, where a plan administrator appropriately withholds U.K. taxes, the taxes are considered to be non-business taxes paid to the U.K. Consequently, the recipient 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 are frequently asked about the transfer of amounts out of a U.K. pension plan to an RRSP. While you have not requested this information, we offer the following comments for your consideration.

CCRA's general views regarding the transfer of amounts from non-registered pension plans to an RRSP are found in Interpretation Bulletin IT-528 Transfers of Funds Between Registered Plans (http://www.ccra-adrc.gc.ca/E/pub/tp/it528/it528-e.html). As described in paragraph 26 of the bulletin, an individual may claim a deduction for the amount of a foreign pension that is included in income, if the amount is transferred into an RRSP. However, the deduction is only available for the transfer of a superannuation or pension benefit that is not part of a series of periodic payments received from a non-registered pension plan for services provided by an individual in a period throughout which that individual was not resident in Canada. The transfer must also be made for the year the amount is included in the individual's income or within 60 days after the end of the year.

We trust that these comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch