7 June 2006 External T.I. 2006-0168091E5 - Hong Kong pension payments

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: Is a Canadian resident taxable on lump sum and periodic payments received from a Hong Kong pension plan relating to periods during which he was a non-resident?

Position: The amounts are taxable as superannuation or pension benefits under subparagraph 56(1)(a)(i) of the Act. An offsetting deduction may be available under subparagraph 60(j)(i) with respect to the lump sum payment from the foreign pension plan.

Reasons: Interpretation of the legislation; consistent with many prior opinions.

XXXXXXXXXX 						2006-016809
							Renée Shields
(613) 948-5273
June 7, 2006

XXXXXXXXXX:

Re: Hong Kong Pension Plan

This is in response to your letter of January 4, 2006 addressed to the Calgary Tax Services Office ("TSO") inquiring about the taxation of amounts to be received from the pension plan of your former employer, the Hong Kong Government. The Calgary TSO has forwarded your letter to this Directorate for reply.

The situation outlined in your letter is a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and relevant documentation to the Calgary TSO for their views. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Canadian residents are taxable under subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"), in the year of receipt of a superannuation or pension benefit. Generally speaking, a payment qualifies as a superannuation or pension benefit if it originates from an arrangement to which contributions have been made 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. Subparagraph 56(1)(a)(i) of the Act applies to benefits from a foreign pension plan that are attributable to services rendered while the individual was not a resident of Canada. Our comments are based on the assumption that the plan to which you have referred fits within this description.

The requirement to include in income the amount of a pension benefit payment from a foreign plan exists unless a provision of an income tax convention between Canada and the other country applies to exclude the amount from income. We note that Canada does not have a tax treaty with Hong Kong and the Canadian courts have confirmed that the income tax convention between Canada and China does not apply to Hong Kong. Accordingly, the full amount received, before withholding taxes, should be reported on your T1 tax return at line 115. The amount should be reported in Canadian currency using the particular exchange rate in effect at the time the amount was received.

You have also asked whether any tax deferral is available with respect to these pension benefits. Where a superannuation or pension benefit received out of a foreign pension plan is included in income, an offsetting tax deduction is available under paragraph 60(j) of the Act for the amount thereof that is contributed to an RRSP in the year of receipt, or within 60 days after the end of the year. This deduction is discussed in paragraph 26 of Interpretation Bulletin IT-528, "Transfers of Funds Between Registered Plans." Certain conditions must be met in order to be eligible for this deduction. Specifically:

(i) the benefit payment must not be exempt from Canadian tax by reason of a tax treaty;

(ii) the benefit must not be part of a series of periodic payments (in other words, only a lump sum payment qualifies);

(iii) the benefit must be attributable to services rendered by the recipient or his or her spouse in a period throughout which such person was not resident in Canada, and

(iv) the amount must be designated by the taxpayer in his or her return of income under Part I of the Act for the year.

Where a taxpayer is entitled to a deduction pursuant to subparagraph 60(j)(i) of the Act, the deduction should be claimed on line 208 of the T1 return. Additionally, a completed Schedule 7, "RRSP Unused Contributions, Transfers, and HBP or LLP Activities", should be attached to the return.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch