13 November 2007 External T.I. 2007-0230391E5 - State pension received from Italy

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: Tax consequences for a resident of Canada of receiving a pension from the Italian state for services rendered to the Italian State when the individual was a non-resident of Canada.

Position: Amount included in subparagraph 56(1)(a)(i) of the Act and deducted from taxable income pursuant to subparagraph 110(1)(f)(i) of the Act. Not entitled to a foreign tax credit.

Reasons: According to paragraph 2 of Article XVIII of the tax treaty between Canada and Italy which is in force (and paragraph 3(a) of Article 18 of the tax treaty that is not yet in force), the pensions paid by, or out of funds created by, the Italian State or a political or administrative subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in Italy.

XXXXXXXXXX 								2007-023039
									Sylvie Labarre, CA
November 13, 2007 

Dear Sir/Madam:

Re: Pension received from the Italian government

This is in reply to the letter of January 25, 2007 that you sent to the Vancouver Tax Services Office in which you requested our views with respect to the tax consequences when an individual, resident of Canada, receives a state pension from the Italian government for government services rendered in Italy.

Our comments

As mentioned in paragraph 6 of Interpretation Bulletin IT-502, a superannuation or pension benefit which is attributable to services rendered by the person while not resident in Canada does not constitute income from an office or employment to the recipient but is taxable by virtue of subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act") in the hands of a resident of Canada. However, the pension received by a resident of Canada out of an unregistered foreign superannuation or pension plan may be exempted from Canadian federal income taxes by the provisions of a tax treaty. In a situation where there is an exemption by the provisions of a tax treaty, the amount of the pension would be included in the income pursuant to subparagraph 56(1)(a)(i) of the Act and a corresponding amount would be deducted from the taxable income under subparagraph 110(1)(f)(i) of the Act as an amount exempt from income tax in Canada because of a provision contained in a tax convention or agreement with another country that has the force of law in Canada.

In a situation where the amount of the pension is exempted from income pursuant to subparagraph 110(1)(f)(i) of the Act, that amount will not be included in the qualifying income that would give rise to a non-business foreign tax credit because the "qualifying income" which is defined in subsection 126(9) of the Act shall be computed without "any portion of income that was deductible under subparagraph 110(1)(f)(i) in computing the taxpayer's taxable income". Therefore the question in your particular situation is whether the state pension received is exempted from the federal income tax by virtue of the tax treaty. By "state pension", we understand that you mean a pension received from the Italian state for services rendered to that State. Paragraph 2 of Article XVIII of the Convention between Canada and Italy that entered into force on December 24, 1980 (or paragraph 3(a) of Article 18 of the Convention between the Government of Canada and the Government of the Italian Republic that is not in force yet) provides that pensions paid by, or out of funds created by, the Italian State or a political or administrative subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in Italy. Considering our understanding of the facts mentioned in your letter and assuming that the taxpayer was a non-resident of Canada when the services were rendered to the Italian State, the comments mentioned above would apply to the state pension that is, the income would not be subject to income tax in Canada through the application of subparagraph 110(1)(f)(i) of the Act and the recipient would not be entitled to claim a foreign tax credit in respect of the state pension.

We trust the above comments will be of some assistance. We apologize for the delay required in responding.

Yours truly,

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