6 April 2006 External T.I. 2005-0144501E5 - Division of a foreign pension

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: Whether the division of a foreign pension will be recognized such that the recipient will only include half of the gross proceeds of the pension benefits in his income while the other half, which the taxpayer forwards to his former spouse, will be included in her income?

Position: Based on the limited information provided, likely yes.

Reasons: The situation appears to be essentially the same as the situation in the tax case of Carol Ann Walker, wherein the court ruled the division of the pension benefits should be recognized since this was the intention of the parties.

XXXXXXXXXX  					2005-014450
J. Gibbons, CGA
April 6, 2006

Dear XXXXXXXXXX:

Re: Division of a German Pension

This is in reply to your letter dated July 28, 2005, in which you enquired about the income tax treatment of a German pension (the "Particular Benefits") received by a Canadian taxpayer (the "Taxpayer"), where half of the Particular Benefits are due to the Taxpayer's former spouse pursuant to a written separation agreement. It is our understanding that both the Taxpayer and his former spouse are resident in Canada. Since the German pension authority has refused to divide the Particular Benefits and issue two cheques, i.e., one to the Taxpayer and one to his former spouse, the Taxpayer will receive the full amount of the Particular Benefits and will pay his former spouse's share directly to her. According to the excerpt of the Taxpayer's written separation agreement which was included in your letter, this appears to be provided for explicitly in such agreement which states as follows:

"XXXXXXXXXX"

Based on the information in your letter, it is our understanding that you believe the Particular Benefits are considered pension benefits and will be included in income under subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act").

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by our Directorate only where the transactions are proposed and the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the applicable tax services office. Nonetheless, we have provided some general comments below, which we hope will be of some assistance to you.

Periodic or lump-sum benefits received under a foreign superannuation or pension fund or plan by a resident of Canada are generally taxable in Canada pursuant to subparagraph 56(1)(a)(i) of the Act, subject to the provisions of any applicable tax treaty. Whether an amount is a benefit received out of or under a superannuation or pension fund or plan is a question of fact. Normally, we would consider a superannuation or pension fund or plan is one 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 periodic payment to the employee on or after the employee's retirement. In some cases, a plan may be considered a superannuation or pension plan where amounts have been contributed by a government.

Paragraph 11 of IT-499R, Superannuation or Pension Benefits, states that if there is a division of pension benefits on a marriage breakdown, generally the pension benefits legislation of a province provides the terms under which a portion of the pension benefits of a member of a pension plan may be paid to a spouse or former spouse under a domestic contract, a written separation agreement, or under a divorce decree or court order under a provincial family law act relating to a division of property on the breakdown of the marriage. The paragraph indicates that, in these circumstances, the portion received by each spouse or former spouse at a time permitted under the pension benefits legislation of the province is income of that spouse or former spouse as a pension benefit under subparagraph 56(1)(a)(i) of the Act, even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payment.

Pursuant to the Tax Court of Canada case Carol Ann Walker v. The Queen (95 DTC 753), which was affirmed by the Federal Court of Appeal (2000 DTC 6025), it is also necessary to consider the intention of the parties as expressed in the separation agreement when determining the income tax treatment of divided pension income. According to the facts in Walker, the written separation agreement entered into between the appellant and her former husband provided that the latter would assign one-half of the gross proceeds of his military pension income to the appellant. Accordingly, the Tax Court of Canada concluded that the parties clearly intended that the pension would be allocated at source so that the administrator would issue two cheques each month. In their view, the "inability of the administrator of the military pension to give effect to the assignment ...cannot nullify what the parties achieved in their separation agreement." They therefore concluded that the amount received by the appellant from her former spouse in respect of her share of her former spouse's pension income should be taxed as pension benefits under subparagraph 56(1)(a)(i) of the Act.

From the small excerpt of the Taxpayer's separation agreement, referred to above, it appears that it was the parties' intention that one-half of the gross proceeds of the Particular Benefits would be assigned by the Taxpayer to his former spouse at source, as in the Walker case. Accordingly, provided that this separation agreement conformed to the particular provincial law governing the division of family property on marriage breakdown, it is our view that the Taxpayer's situation is essentially the same as in the Walker case. Thus, the amounts paid by the Taxpayer to his former spouse, representing the portion of the Particular Benefits that the Taxpayer's former spouse was entitled to receive pursuant to the written separation agreement, would be considered pension benefits received by her and taxed accordingly.

Concerning your question whether the Particular Benefits will qualify for the pension credit under subsection 118(3) of the Act, this determination is a question of fact that depends on the age of the particular recipient and whether the Particular Benefits meet the definition of pension income or qualified pension income, as the case may be, in subsection 118(7) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch