25 August 2003 External T.I. 2002-0173325 - 56(1)

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 payments sourced in the U.K.

Position:

Provided very limited general commentary.

Reasons:

It is a question of fact whether the payments are taxable pension payments.

XXXXXXXXXX 2002-017635
W. C. Harding
August 25, 2003

Dear XXXXXXXXXX:

Re: Taxation of United Kingdom (U.K.) Plans and Transfers to RRSPs

This is in reply to your letter of June 25, 2002, in which you requested clarification of the income tax treatment in respect of amounts received out of or under a particular arrangement described as a U.K. Personal Pension Scheme (a "PPS").

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 (as updated June 27, 2003). Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. Accordingly, since your enquiry pertains to a specific arrangement we cannot provide you with specific answers to your inquiry at this time.

The information provided with your submission indicates that the arrangement is a PPS established in the mid-1980s for the benefit of your client using employer contributions. However, information available on the Internet in the U.K. Inland Revenue publication IR3 entitled Personal Pension Schemes (including Stakeholder Pension Schemes) indicates that the PPS provisions were enacted with effect from July 1, 1988 and that, in general, PPSs replaced retirement annuities, which were a type of private pension sold before that date.

The information provided in your letter also indicates that contributions continued to be made to the particular arrangement for two years after your client moved to Canada, that the PPS was held in trust, that it was converted in the 1990s from a defined benefit plan to a valued amount plan, and that it has been transferred between various investment companies. Accordingly, it would seem that the arrangement might have been an annuity at some point in time, for the reasons noted in the previous paragraph but has at various times since been transferred or amended.

As previously discussed during our telephone conversations (XXXXXXXXXX/Harding), the details provided in your submission are not sufficient for us to make any specific determinations with respect to the questions you raised in respect of the Canadian taxation of the arrangement or with respect to the transfer of amounts held under the arrangement to a Canadian arrangement such as an RRSP. In order for us to answer these questions, we would need to be provided with the documentation and particulars of the creation of the arrangement, its administration and the amendments that have been made to it over the period of its existence. In the alternative, we can only provide the following comments, which are general in nature and are not binding on the CCRA.

An amount received out of a foreign plan will be taxable as pension income in accordance with the provisions of subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act") if the foreign plan is a superannuation or pension plan. In our opinion, this will occur where contributions have been made to the foreign 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.

It is not material to this discussion whether a pension would be taxable if a resident of the U.K received the amount. Where a resident of Canada receives an amount out of a foreign pension plan that qualifies as a superannuation or pension plan or arrangement for purposes of the Act, 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.

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 is outside this Directorate's mandate to provide opinions regarding foreign domestic laws. Accordingly, you may wish to discuss the taxation of your pensions with the appropriate authorities in the U.K. However, we can note that pension payments sourced in the U.K. may be subject to taxation in accordance with any relevant U.K. legislation, subject to the provisions of the Canada-U.K. Income Tax Convention (the " Convention"). In general terms, Article XVII of the Convention provides that pension payments arising in the U.K. that are paid to a resident of Canada will only be taxable by Canada. However, 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 U.K., but does not include any payment under a superannuation, pension or retirement plan in settlement of all future entitlements under such a plan.

For Canadian income tax purposes, where a plan administrator appropriately withholds U.K. taxes, 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.

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.

The provisions of the Act that pertain to the taxation of arrangements held by an individual when the individual migrates to Canada and the taxation of such arrangements after the holder has become a resident, have been the subject of a number of amendments over recent years. As a consequence, we have not discussed these matters in this letter given the limited details of the arrangements and of your client's immigration. Furthermore, it should be noted that the application of these provisions may effect the treatment of the arrangement as outlined above.

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

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