2 November 2006 External T.I. 2005-0160601E5 - Social security benefit - Hungary

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 an amount of social security/state pension benefits received from the government of Hungary, by a Canadian resident, is taxable in Canada?

Position: It depends on whether the amount is paid pursuant to the social security legislation of Hungary and on whether the amount is subject to tax in Hungary.

Reasons: Article 18 of the Canada-Hungary tax convention.

XXXXXXXXXX 								2005-016060

November 2, 2006

Dear Sir:

Re: Social security/state pension benefits from Hungary

This is in reply to your letter of November 21, 2005 in which you requested our opinion concerning the taxation of an amount of social security/state pension benefits received by a Canadian resident from the Republic of Hungary.

Written confirmation of the income 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 as describes in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

Pursuant to subparagraph 4(c) of Article 18 of the Canada-Hungary Tax Convention (the "Convention"), Canada cannot tax pensions and allowances paid under the social security legislation of Hungary and received by Canadian residents so long as the social security payments are not subject to tax in Hungary.

To benefit from that subparagraph in a particular situation, there are two conditions: the payments are made under the social security legislation of Hungary and the payments are not subject to tax in Hungary. The individual may have to prove that the two conditions are met in order to benefit from the exemption in Canada.

Where subparagraph 4(c) of Article 18 of the Convention applies, the Canadian individual must include the social security pension receipts in his or her income pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act (Canada) (the "Act") and the social security pension that is exempt because of a treaty provision is then deducted from taxable income pursuant to subparagraph 110(1)(f)(i) of the Act. Where subparagraph 4(c) of Article 18 of the Convention does not apply, Canada may tax a pension and annuity arising in Hungary pursuant to paragraph 1 of Article 18 of the Convention. Hungary may also tax, within certain limits, the payments. The Canadian individual must include in his or her income the payments received pursuant to subparagraph 56(1)(a)(i) of the Act. The Canadian individual may be entitled to a foreign tax credit in respect of the income tax paid in Hungary, if any. Interpretation Bulletin IT-270R3 provides more information on the foreign tax credit. This bulletin can be accessed on the CRA website at the following address:

http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

We trust the above comments will be of some assistance.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch