15 March 2004 External T.I. 2004-0061491E5 - 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.

Principal Issues: Request for general information concerning the receipt of a foreign pension..

Position: Provided general commentary.

Reasons: Reply depends on nature of the plan which could not be determined from the information provided.

XXXXXXXXXX 2004-006149
W. C. Harding
March 15, 2004

Dear XXXXXXXXXX:

Re: Transfer of Foreign Pension Plan to an RRSP

This is in response to your enquiry of February 10, 2004 concerning the receipt of amounts out of foreign pension plans and the transfer of these amounts to registered retirement savings plans ("RRSPs").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. The following comments are, therefore, of a general nature and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address:

http://www.cra-arc.gc.ca/formspubs/menu-e.html

Please note that CRA cannot provide tax advice, although we will endeavour to respond to questions concerning Canadian tax liability and filing requirements. General tax information as well as access to a collection of useful pamphlets and guides designed specifically for persons immigrating to Canada, may be found on our website. We refer you in particular to pamphlet T4055, Newcomers to Canada.

You advised that you are a beneficiary under a Hong Kong government pension and that you expect to receive a lump sum payment of about HK$XXXXXXXXXX and an annual pension of HK$XXXXXXXXXX after you turn XXXXXXXXXX years of age on XXXXXXXXXX. You also advised that the pension benefits were earned while you were not a resident of Canada and we have also assumed, for the purposes of this reply that they were not earned in respect of services performed in Canada. However, it remains that, based on this limited information, we are unable to confirm whether the payments in question would, in fact, be pension or superannuation payments, a retiring allowance or possibly some other kind of employment benefit.

For purposes of the Income Tax Act (the "Act"), the term "superannuation or pension benefit" is defined under subsection 248(1) of the Act to include any amount received out of or under a superannuation or pension fund or plan and any payment made to a beneficiary under such a plan or fund in accordance with the terms of, or resulting from the amendment or termination of, the plan or fund. The determination of whether a particular plan would constitute a superannuation or pension fund for purposes of the Act is a question of fact. However, the Canadian courts have generally found that a plan will not be a superannuation or pension plan where only the beneficiary of the plan has made contributions. The courts have in particular, frequently cited the 4th definition of pension as set out in the Shorter Oxford English Dictionary as support for their decisions. This definition provides that a pension is:

"4. An annuity or other periodical payment made, esp. by a government, a company, or an employer of labour, in consideration of past services."

Accordingly, a plan will, in general, be considered to be a superannuation or pension fund where 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 and the contributions are used to provide an annuity or other periodical payment on or after the employee's retirement in consideration for his or her employment services, and, in some cases, where amounts have been contributed under the plan by a government.

Because of these decisions, we have also taken the general position that amounts received out of a foreign plan where only employee contributions have been made, will not be superannuation or pension benefits.

If it is determined that a plan situated in a particular country is a superannuation or pension fund for purposes of the Act, any amounts received by a Canadian resident out of the plan subsequent to that person's immigration to Canada will normally be included in the recipient's income under subparagraph 56(1)(a)(i) of the Act unless a provision of an income tax convention between Canada and the other country applies to exclude the amount from income. However, Canada does not currently have a tax treaty with Hong Kong and Canadian courts have confirmed that the income tax convention between Canada and China does not apply to Hong Kong.

As indicated in your letter, CRA's general views regarding the transfer of amounts from a non-registered pension plan to an RRSP are found in Interpretation Bulletin IT-528 Transfers of Funds Between Registered Plans". Paragraph 26 of IT-528 discusses the application of subparagraph 60(j)(i) of the Act which allows a deduction for the transfer of a superannuation or pension benefit (that is not part of a series of periodic payments) from a non-registered pension plan for services provided by an individual in a period throughout which that individual was not resident in Canada. To be eligible for a deduction under subparagraph 60(j)(i) for the transfer of a superannuation or pension benefit to an individual's RRSP, the individual has to include the benefit in income for the year under subparagraph 56(1)(a)(i) of the Act (as discussed above) and the transfer has to be made for the year the amount is included in the individual's income or within 60 days after the end of the year. It should also be noted that the transfer of the superannuation or pension benefit under subparagraph 60(j)(i) of the Act has to be made to the individual's RRSP and not to an RRSP established for the benefit of the individual's spouse.

In your situation, if the Honk Kong plan is a pension plan, the lump sum receipt described above may satisfy this requirement for such a transfer to an RRSP but the periodic payments described would not be so qualified. However, the periodic receipts might be contributed to an RRSP as normal contributions, if you have any unused RRSP contribution room at the time they are received.

In respect of the declaration of amounts on immigration to Canada, we note that many foreign trusts are subject to special rules under the Act that could result in the taxation of amounts held in the trust for the benefit of an individual at the time the individual becomes a resident of Canada, as well as the taxation of amounts subsequently earned in the trust for the benefit of the individual. These rules are complex and are currently the subject of proposed legislation. However, the rules do not apply to trusts referred to as "exempt foreign trusts" including trusts governed by foreign pensions. Accordingly, the rules would not likely apply in your circumstances, if the Honk Kong plan is a pension plan, and we will therefore not provide any additional comments at this time.

A Canadian resident is generally required to file a Foreign Income Verification Statement (T1135) if at any time in a taxation year the total cost amount of all specified foreign property of the resident is more than $100,000. However, "specified foreign property" does not include an interest in a non-resident trust that principally provides superannuation, pension, retirement or employee benefits primarily to non-resident beneficiaries, if it does not pay income tax in the taxing jurisdiction where it is resident. Accordingly, we would expect that most individuals having an interest in a foreign pension plan would be exempted from this filing requirement.

You made reference to clause 56(1)(a)(i)(C.1) of the Act and the definition of "foreign retirement arrangement" in subsection 248(1) of the Act. Please note that a "foreign retirement arrangement" is defined to mean a plan or arrangement as prescribed by the Income Tax Regulations (the "Regulations") and section 6803 of the Regulations presently only prescribes those plans or arrangements to which subsections 408(a), (b) or (h) of the United States Internal Revenue Code applies. Therefore, an arrangement or plan established under Hong Kong law is not a "foreign retirement arrangement" under the Act.

A pension receipt that must be reported as income, should be reported as such in your income tax return for the year of receipt. For 2003, the amount would be reported on line 115 of the T1 Income Tax Return. The same amount should be recorded on line 1 of the pension income amount calculation on the federal worksheet. There would be no offsetting amount to deduct at line 6 of the calculation if the amount is received from a Hong Kong pension. Accordingly, a pension income tax credit should be available with respect to the pension income receipt.

Pension receipts are normally recorded in the Canadian dollar equivalent determined according to the rate of the exchange prevailing at the time of the transaction. In general, if you receive a payment of your pension in foreign currency and convert it to Canadian currency shortly after its receipt, the exchange rate applied by the financial institution on processing the transaction may be applied. Otherwise, you should refer to the commentary provided in our Interpretation Bulletin IT-95R Foreign Exchange Gains and Losses. Bank of Canada exchange rates are available on the internet at www.bankofcanada.ca/en/exchange.htm.

Foreign pension amounts received by a Canadian resident may be subject to tax withholdings in the country of origin and these taxes may be considered to be non-business taxes paid to that country. Consequently, a taxpayer may be entitled to claim a foreign tax credit with respect to the taxes deducted from any lump-sum or periodic receipts reported as income. Interpretation Bulletin IT-270R2 Foreign tax credit, provides CRA's general views on the computation of the foreign tax credit. Please note that, for purposes of the credit, the gross amount of any pension included in income is used in calculating the credit, even though all or a portion of the amount may be transferred to an RRSP.

We trust that these comments will be of assistance.

Yours truly,

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