30 January 2008 Ministerial Correspondence 2007-0262251M4 - foreign disability 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: Taxation of US military disability pension received by a resident of Canada.

Position: The pension must be included in income but is likely deductible in calculating taxable income.

Reasons: The Act and the Canada-US treaty provide for the inclusion of the amount in income but also allow a deduction provided it would be tax free if received by a resident of the U.S.

January 30 2008

XXXXXXXXXX

Dear XXXXXXXXXX :

I am writing in response to the email you sent to your provincial Member of Parliament, XXXXXXXXXX , concerning the taxation of your United States military pension in Canada. I received a copy of your email from the office of your federal Member of Parliament, XXXXXXXXXX , on November 15, 2007.

I understand that you recently provided additional details relating to your situation and discussed your specific concerns with Mr. Wayne Harding, a senior rulings officer with the Income Tax Rulings Directorate of the Canada Revenue Agency (CRA).

Both the United States and Canada tax regular military pension income when it is received by veterans. Similarly, both countries exempt most disability benefits received by veterans when they are received because of their military service. Canada and the United States also apply rules set out in the Canada-U.S. Tax Convention to prevent the double taxation of pension income when it is paid by one of the two countries to a resident of the other country.

Canadian residents are taxed on their world income and, in your situation, your world income includes your employment income earned in Canada as well as your pension income received from the United States. Your regular pension income is also taxable by the United States. However, under the Convention, the amount of tax that the United States may apply is limited to 15% of the gross amount you receive and you are entitled to claim a foreign tax credit for the taxes paid to the United States on the pension income.

With respect to the taxation of a United States military disability pension, I understand that these are generally excluded from an individual's taxable income if the recipient is a resident of the United States. In this case, the amount will also be excluded from the taxable income of a recipient who is a resident of Canada. However, to ensure this is done correctly, the recipient must include the amount of the disability pension in the calculation of pension income on line 115 of the individual's Canadian income tax return and deduct the same amount on line 256 of the return. The amount should also be identified as pension income exempt under the Convention.

I understand that you still feel the Canadian taxation of United States military pensions as I have described above is unfair and should more closely reflect the taxation of such amounts received in the United States. The CRA is responsible for administering the tax system and applying current tax legislation. Your concern relates to tax policy, and any changes to that policy or amendments to the legislation have to be proposed by the Minister of Finance and approved by Parliament. I am therefore forwarding a copy of your correspondence to the Honourable James M. Flaherty, Minister of Finance, for his consideration.

I trust that the information provided and the referral will be helpful.

Sincerely,

The Honourable Gordon O'Connor, P.C., M.P.

c.c.: XXXXXXXXXX

The Honourable James M. Flaherty, P.C., M.P.

Minister of Finance
House of Commons
Ottawa ON K1A 0A6

Wayne Harding
613-957-9769
January 15, 2008
2007-026225