15 October 2012 External T.I. 2012-0442561E5 - German reparation 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: Are German reparation pension payments known as “Wiedergutmachungs rente” received by a Canadian resident taxable for Canadian tax purposes?

Position: The German reparation pension payments in question are likely not taxable. It would be a question of fact whether the payments are excluded under 81(1)(g) of the ITA or deductible under 110(1)(f) due to subparagraph 3(b) of Article 18 of the Treaty. It is likely that the payments are excluded under 81(1)(g).

Reasons: See below.

XXXXXXXXXX
2012-044256
W. Doiron
October 15, 2012

Dear XXXXXXXXXX:

Re: German Reparation Pension

This letter is in response to your request as to whether the receipt of ‘Wiedergutmachungs rente’ (“Reparation”), namely a restitution pension received as compensation pursuant to the German BEG is taxable for Canadian tax purposes. It is our understanding that the BEG is formally known as the Federal Law for the Compensation of the Victims of National Socialist Persecution.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

General Comments

As noted in your letter, it is correct that the Canada-Federal Republic of Germany Tax Agreement (the “Treaty”), entered into force on March 28, 2002, changed the way social security pensions received from Germany by a resident of Canada are taxed starting in the 2003 tax year. However, these changes impacted the taxation of social security pensions and do not impact pensions received pursuant to the BEG, based on our understanding of the nature of the payment. The document you referred to in your letter is concerned with pension benefits derived under the German social security legislation.

In general, a taxpayer who is a Canadian resident is taxable on worldwide income as required under section 3 of the Income Tax Act (“ITA”). Subparagraph 56(1)(a)(i) of the ITA requires that any superannuation or pension benefit received by the taxpayer in the year be included in the income of the taxpayer for the taxation year. Subsection 248(1) defines superannuation or pension benefit to include, among other things, any amount received out of or under a superannuation or pension fund. Based on our understanding of the situation you described, it is our view that the Reparation payment would be considered a payment out of a pension fund.

Although subparagraph 56(1)(a)(i) of the ITA requires the Reparation payment to be included in income it may be excluded from that requirement by virtue of paragraph 81(1)(g). Paragraph 81(1)(g) of the ITA provides that in calculating the income of a taxpayer for a taxation year, amounts received as compensation by a victim of National Socialist persecution will not be included. In order for paragraph 81(1)(g) to apply, certain requirements must be met.

First, the payment must be made by the Federal Republic of Germany ("Germany") or by a public body performing a function of government within Germany. The second requirement is that the funds received must not be subject to tax under Germany's income tax laws. If ultimately it is determined that the Reparation in question meets all of the criteria set out in paragraph 81(1)(g), the taxpayer will not be required to include the amount in income. It is our understanding that compensation received pursuant to BEG laws are not taxable in Germany; therefore, it is likely that the Reparation payments are excluded from income.

If, in the event that the Reparation payment is determined to be taxable in Germany and paragraph 81(1)(g) doesn’t apply, then we would consider the application of Article 18 of the Canada-Federal Republic of Germany Income Tax Convention (the "Treaty"). Subparagraph 3(b) of Article 18 of the Treaty provides that payments received by a Canadian resident from Germany as compensation for an injury or damage sustained as a result of hostilities or past political persecution shall be taxable only in Germany. As a result, based on our understanding of the situation, it would appear that the Reparation payments may not be taxable for Canadian tax purposes. If this is the case, the payment would, however, still be required to be included in the taxpayer's net income under subparagraph 56(1)(a)(i) of the ITA, but would be deductible in computing taxable income by virtue of subparagraph 110(1)(f)(i) of the ITA. Please note that while in this case the Reparation payments may still ultimately not be taxable, the inclusion in net income and deduction from taxable income can have an impact on the determination of income-tested benefits.

We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch