23 November 2009 External T.I. 2009-0311631E5 - Commutation payment from pension plan

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 commutation payment received from a foreign pension plan subject to tax in Canada?

Position: Provided general comments.

Reasons: Based on the limited information provided, the commutation payment is likely a pension benefit taxable under paragraph 56(1)(a).

XXXXXXXXXX 								2009-031163

November 23, 2009

Dear XXXXXXXXXX :

Re: Commutation Payment from Pension Plan

We are writing in response to your email of February 23, 2009 wherein you requested our comments on whether a commutation payment received by you is subject to Canadian income tax.

You advise that you are currently a resident of Canada. Previously, while a resident of the United Kingdom ("UK"), you worked for an employer in the UK that arranged for a group pension plan through an insurance company. The UK employer and all of its employees made contributions to the plan. On your retirement in XXXXXXXXXX , you received a fixed monthly pension from the plan that was funded by an annuity contract. The monthly payments were determined based on years of service and contributions made into the plan. In XXXXXXXXXX , the insurance company offered to all of the annuitants a lump-sum commutation payment in full and final settlement of its liability under the annuity contract. You accepted the offer and received the commutation payment in XXXXXXXXXX .

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Canadian residents are generally required to include in their income all amounts received as a "superannuation or pension benefit" pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"). A "superannuation or pension benefit" includes any amount received out of a superannuation or pension fund or plan. Generally, a plan will be considered a superannuation or pension fund or plan where contributions have been made to the plan 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 payments on or after the employee's retirement in consideration for his or her employment services. 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.

Whether or not the lump-sum payment you received is an amount received out of or under a superannuation or pension fund or plan is question of fact. Such a determination can only be made after a review of the terms of the specific pension arrangement and other relevant documentation. However, based on the limited information provided, it appears likely that the pension arrangement is a UK pension arrangement that is a superannuation or pension plan. If this is the case, the lump-sum commutation payment received by you is required to be included in your income as a superannuation or pension benefit unless a specific provision of the Act or the Canada-UK Income Tax Convention (the "Convention") applies to exclude the amount from income. In this regard, the Convention does not limit Canada's right to tax lump-sum pension payments received from a UK pension plan by a Canadian resident. Accordingly, the lump-sum commutation payment should be converted to Canadian currency using the exchange rate in effect at the time the amount was received and reported in your XXXXXXXXXX tax return.

For Canadian tax purposes, where a plan administrator appropriately withholds UK taxes, an individual may be entitled to claim a foreign tax credit with respect to the taxes withheld. In basic terms, the foreign tax credit is computed as the lesser of the foreign taxes paid and an amount that is approximately equal to the taxes the resident of Canada would otherwise pay in respect of the payment. For additional details on the foreign tax credit rules, please refer to Interpretation Bulletin IT-270R3, Foreign Tax Credit.

Finally, you mentioned in your letter that you do not have a registered retirement income fund (RRIF) that you can transfer the commutation payment into. We note that even if you had a RRIF, there is no provision in the Act that provides for a deduction for a transfer of a foreign pension benefit to a RRIF. Subparagraph 60(j)(i) of the Act allows a deduction for a pension benefit received by an individual from a non-registered pension plan (such as a foreign pension plan) that is transferred to a registered pension plan or a registered retirement savings plan.

We trust that these comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch