6 December 2007 External T.I. 2007-0236891E5 - German pensions

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: Taxation of German social security

Position: Treaty exempt to extent it would not be taxable in Germany if received by resident of Germany

Reasons: Article 18(3)(c) of Canada- Germany tax treaty

XXXXXXXXXX 2007-023689

December 6, 2007

Dear XXXXXXXXXX

Re: German social security pensions received by a resident of Canada

This is in response to your letter dated May 8, 2007 wherein you requested clarification on the different tax treatment for German social security payments ("German pensions") received by a resident of Canada over the last few years.

In general, all foreign pensions such as the German pensions are required to be included in income in accordance with paragraph 56(1)(a) of the Income Tax Act (the "Act"). Then, in some cases, all or a portion of the foreign pensions may be exempt from Canadian tax by virtue of a provision contained in an income tax convention ("tax treaty") that Canada has with another country. Subparagraph 110(1)(f)(i) provides for a deduction from income in respect of any such non-taxable foreign pension amount.

In the case of Germany for the years up to and including 2002, the German pensions were not taxable in Canada based on Article 18 of the old Canada-Federal Republic of Germany Tax Agreement ("the old Treaty").

For the 2003 and subsequent years, the tax treatment for German pensions was changed as a result of paragraph 3(c) of Article 18 of the new Canada-Federal Republic of Germany Tax Agreement ("the new Treaty") which reads:

"benefits under the social security legislation in a Contracting State paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such benefits that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State;

This provision means that the same amount of German pensions that would have been included in income if the individual had been a resident of Germany will be included in income for a resident of Canada.

The CRA publication that you enclosed with your letter entitled "Change to the taxation of social security pensions received from Germany by a resident of Canada - 2003 and 2004" explains how the portion of German pensions that is subject to tax in Canada for the years 2003 and 2004 is determined. The same portion of German pensions would be subject to tax in Germany for a German resident in identical circumstances.

Due to a fundamental reform of the taxation of retirement income in Germany, the portion of German pensions subject to tax in Germany for a German resident was changed. As a result of this, the portion of German pensions that is subject to tax in Canada also changed for the 2005 and subsequent years. The other CRA publication that you enclosed with your letter entitled "Change to the taxation of social security pensions received from Germany by a resident of Canada - BEGINNING 2005" explains this and explains how the portion of German pensions that is subject to tax in Canada for the 2005 and subsequent years should be determined. "Example 1" in this publication describes a situation similar to your client's involving a person who received German pensions before 2005. The Example demonstrates that the amount of the non-taxable portion of the pensions changes from 2005 to 2006 and is then fixed in 2006. The Example also shows that, in 2007, the non-taxable portion of the pensions is equal to the non-taxable portion of the pensions for 2006.

In the course of preparing our response to your query we confirmed with German tax authorities that the information in the CRA publication discussed in the above paragraph was accurate and, in particular, that the amendments to the German tax legislation apply to individuals who had commenced receiving German pensions before 2005.

In summary, the 2005 change for the taxation of German pensions is a result of the reform of the taxation of retirement income in Germany. The provisions of paragraph 3(c) of Article 18 of the new Treaty and the provisions of the Act did not change.

We trust these comments will be of assistance to you.

Yours truly,

Olli Laurikainen CA
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch