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: 1) Canadian withholding tax implications in respect of monthly RPP, RRSP, OAS, CPP and QPP payments and a RRSP lump sum payment received by an individual resident of Poland;
2) Canadian income tax implications in respect of sale of a piece of land situated in Canada by an individual prior to and after his/her emigration from Canada; and
3) Limitation period in paragraph 3 of Article 23 of the Canada-Poland Tax Treaty.
Position: General comments.
Reasons: The provisions of the Income Tax Act, Canada-Poland Tax Treaty and related legislation.
May 13, 2014
This is in response to your letter of March 5, 2014, addressed to the Director of the Competent Authority Services Division, in which you requested their view as to certain tax consequences resulting from the circumstances described in your letter. Your letter was forwarded to the Income Tax Ruling Directorate of the Canada Revenue Agency (CRA) for response.
This technical interpretation provides general comments about the provisions of the Income Tax Act ("the Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Ruling.
The circumstances described in your letter do not appear to involve or otherwise identify a particular interpretational concern with respect to a particular provision of the Act or a tax treaty and, at least partially, pertain to a proposed transaction. Since it is not this Directorate's practice to comment on transactions involving a specific taxpayer other than in the form of an advance income tax ruling request, we may only offer the following general comments, which may be of assistance to you.
The following hypothetical circumstances will be used to address your request:
- A Canadian resident individual (the "Taxpayer") will emigrate from Canada and become a resident of Poland;
After the emigration, the Taxpayer will be receiving certain payments from Canada (both personal entitlements and entitlements in respect of the Taxpayer's late spouse, as applicable): payments from a registered pension plan (RPP) and a registered retirement savings plan (RRSP), as well as the Old Age Security (OAS), Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits;
- The Taxpayer contemplates withdrawing all funds from the RRSP as a lump sum amount after the emigration; and
- The Taxpayer owns a piece of land in the province of Quebec that will be sold or gifted to a related person either prior to or after the emigration.
In respect of the above hypothetical circumstances, your enquiries can further be summarized as follows:
1) What will be the taxation of the monthly RPP, RRSP, OAS, CPP and QPP payments received by the Taxpayer once the Taxpayer ceases to be a resident of Canada and becomes a resident of Poland and what will be the applicable tax rate in the circumstances where all funds are withdrawn from the RRSP as a lump sum payment?
2) Would the Taxpayer have to be a resident of Canada for the entire taxation year in which the Taxpayer sells a property (the piece of land) in order to report the disposition as a Canadian resident and what would be the tax rate if the land is sold after the emigration of the Taxpayer?
3) What is the relevance of the nine year period in paragraph 3 of Article 23 of the Convention between Canada and the Republic of Poland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("the Treaty")?
1) Withholding tax on pension payments
The RPP, RRSP, OAS, CPP and QPP payments to non-residents are subject to Canadian tax under Part XIII of the Act at the rate of 25% pursuant to paragraphs 212(1)(h) and 212(1)(l) of the Act, unless the rate of withholding tax is reduced or eliminated under a tax treaty entered into between Canada and the country in which the recipient of such payments is resident.
Article 17 (Pensions and Annuities) of the Treaty addresses the taxation of "pensions and annuities" paid to a resident of either Canada or Poland. However, the Treaty does not define the term "pension".
Pursuant to paragraph 5(a) of the Income Tax Conventions Interpretation Act, if a convention does not include a definition "pension", "pension" means, in respect of payments that arise in Canada, a payment under any plan, arrangement or contract that is
(i) a registered pension plan,
(ii) a registered retirement savings plan
(ix) a superannuation, pension or retirement plan not otherwise referred to in this paragraph.
As stated in paragraph 14 of Information Circular IC 76-12R6, Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries With Which Canada Has a Tax Convention, the definition of "pension" in the Income Tax Conventions Interpretation Act (in particular, subparagraph (ix) above) includes such social security benefits as a pension, supplement or spouse's allowance paid under the Old Age Security Act (OAS) or any benefit paid under the Canada Pension Plan Act (CPP) or in a comparable provision of the Quebec Pension Plan Act (QPP).
As such, all of the RPP, RRSP, OAS, CPP and QPP payments to the Taxpayer should be considered "pension" for the purposes of the Treaty.
Article 17 of the Treaty reads as follows:
1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. Pensions arising in a Contracting State and paid to a resident of the other Contracting State may also be taxed in the State in which they arise and according to the laws of that State. However, in the case of periodic pension payments, the tax so charged shall not exceed the lesser of:
(a) 15 per cent of the gross amount of the payment; and
(b) the amount of tax that the recipient of the payment would otherwise be required to pay for the year on the total amount of the periodic pension payments received by the individual in the year, if the individual were resident in the Contracting State in which the payment arises.
The term "periodic pension payments" is not defined in the Treaty. Pursuant to paragraph 5(a) of the Income Tax Conventions Interpretation Act, "periodic pension payment" means, in respect of payments that arise in Canada, a pension payment other than
(a) a lump sum payment, or a payment that can reasonably be considered to be an instalment of a lump sum amount, under a registered pension plan, (b) a payment before maturity, or a payment in full or partial commutation of the retirement income, under a registered retirement savings plan
[the rest of the provision is not relevant for the purposes of this document].
Based on this definition, as long as the RPP, RRSP, OAS, CPP and QPP payments to the Taxpayer do not fall under the exceptions in paragraph (a) and (b) above (or under any other exceptions in the rest of the definition, which, as mentioned above, are not relevant in the hypothetical circumstances described above), these payments should be considered "periodic pension payments". As such, these payments would be subject to the withholding tax at the rate of 15% under paragraph 2(a) of Article 17 of the Treaty.
Conversely, a payment from an RRSP before maturity or in full or partial commutation of the retirement income under an RRSP (such as a lump-sum payment described in the hypothetical circumstances above) is not considered to be a "periodic pension payment" under paragraph 5(a) of the Income Tax Conventions Interpretation Act. As a result, such a payment to the Taxpayer would not be eligible for a reduced rate of withholding tax under the Treaty and, therefore, would be subject to Canadian non-resident withholding tax at the rate of 25% under paragraph 212(1)(l) of the Act.
A table with the applicable withholding tax rates under various tax treaties (including the Treaty) can be found in Information Circular IC 76-12R6, Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries With Which Canada Has a Tax Convention, which is available on the CRA website at: www.cra-arc.gc.ca/E/pub/tp/ic76-12r6/ic76-12r6-e.pdf.
IC 76-12R6 provides some other relevant information which might be of interest in these circumstances, including, for example, the possibility for a non-resident to elect under section 217 of the Act to file a Canadian income tax return reporting pension benefits and similar types of income received from Canada. In this situation, the non-resident may be able to claim non-refundable tax credits and pay tax on the reported income at the same rates as applicable to residents of Canada (the non-resident tax withheld from the reported income may be claimed as a tax credit on the section 217 return in this situation). For more information, see also T4145, Electing Under Section 217 of the Income Tax Act, which is available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tg/t4145/t4145-13e.pdf.
2) Disposition of the piece of land
In order for the sale of the land to be reportable by the Taxpayer while the Taxpayer is still a resident in Canada, the Taxpayer does not have to be a resident for the entire year in which the disposition occurs. It is not the Taxpayer's residency throughout the year of the sale that is relevant, but rather the Taxpayer's residency at the time of the sale. For example, if the sale occurs in 2014 and the Taxpayer ceases to be a resident of Canada later that year, then for the part of 2014 that the Taxpayer was resident of Canada, the Taxpayer has to report her worldwide income for Canadian tax purposes. Worldwide income is income from all sources both inside and outside of Canada and such income would include any gain realized on the sale of the land.
Income Tax Guide T4056, Emigrants and Income Tax 2013, may be of assistance in these circumstances. The Guide is available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tg/t4056/t4056-13e.pdf. This Guide provides some helpful information on the tax consequences of emigration, and in addition, addresses in some detail the election under section 217 of the Act mentioned above.
If the land is disposed of by the Taxpayer after the Taxpayer ceases to be a resident in Canada, such a disposition will still be taxable in Canada due to the fact that real property situated in Canada is considered to be "taxable Canadian property" (as defined in subsection 248(1) of the Act) and the disposition of taxable Canadian property by a non-resident is subject to tax in Canada by virtue of paragraph 2(3)(c) of the Act. In these circumstances, reference may be made to the information available on the CRA website at: http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/dsp/menu-eng.html. This webpage contains helpful information describing the tax implications arising on the disposition by non-residents of certain Canadian properties and the related reporting requirements (in particular, Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property).
In addition, the following documents should also be of assistance in these circumstances:
Further, Income Tax Guide T4037, Capital Gains 2013, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-13e.pdf, provides some helpful information on how the gain or loss on the disposition of the land would be computed. Generally, to calculate a capital gain or loss, the total of the property's adjusted cost base ("ACB") and any outlays and expenses incurred to sell the property are subtracted from the proceeds of disposition.
ACB is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees. It also includes capital expenditures, such as the cost of additions and improvements to the property. As such, ACB of the land to the Taxpayer may be different from the price originally paid to acquire the property.
The term "proceeds of disposition" usually represents the amount received for the property, and in most cases, it refers to the sale price of the property. However, in circumstances where the property is given as a gift or sold to a related person for proceeds less than the fair market value ("FMV") of the property (as in the hypothetical circumstances described above), the Taxpayer is deemed to have received, by operation of paragraph 69(1)(b) of the Act, proceeds of disposition equal to the FMV of the property. FMV is usually defined as the highest dollar value that can be obtained for a property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other. As such, FMV of the land disposed of by the Taxpayer may be different from, for example, the municipal assessment of the property.
Irrespective of whether the Taxpayer disposes of the land while the Taxpayer is a resident or a non-resident of Canada, only 50% of the resulting capital gain ("taxable capital gain") would be taxed at the applicable federal income tax rates for individuals provided for in subsection 117(2) of the Act. These rates are the same for resident and non-resident taxpayers and are dependent on the amount of taxable income (income brackets).
Generally, a non-resident person is also subject to a surtax (provided for in subsection 120(1) of the Act) of 48% of the federal tax on the amount of the non-resident's income for the year where such income is not earned in a Canadian province. However, since the Taxpayer will be disposing of property (i.e., land) that is located in the province of Quebec and considered "taxable Quebec property" under the Quebec legislation, the disposition of such property is taxable in Quebec as income earned in Quebec. As a result, the federal surtax does not apply to the gain arising on such a disposition.
Since the disposition of the land will be taxable in Quebec, whether or not the Taxpayer is resident in that province, and provided also that the Taxpayer is a resident in Quebec immediately before the emigration, Revenu Québec should be contacted for information about the provincial tax liability and reporting requirements both with respect to the emigration of the Taxpayer and the sale of land.
3) Paragraph 3 of Article 23 of the Treaty
Pursuant to paragraph 3 of Article 23 of the Treaty, "a Contracting State shall not, after the expiry of the time limits provided in its domestic laws and, in any case, after nine years from the end of the taxable period to which the income concerned was attributed, change the income of a resident of either of the Contracting States by including therein items of income which have also been included in income in the other Contracting State
In other words, paragraph 3 of Article 23 of the Treaty provides that if an item of income was included in the income of a taxpayer in one country, a corresponding adjustment to income in the other country can only be made within a period ending at the earlier of
(i) the applicable domestic limitation period, and
(ii) nine years.
Even though the normal reassessment period under subsection 152(3.1) of the Act (i.e., domestic limitation period) is generally 3 years (other than for mutual fund trusts or corporations other than Canadian-controlled private corporations), the reassessment period may be extended in certain circumstances. In particular, subparagraph 152(4)(a)(ii) of the Act allows a taxpayer to file a waiver within the normal reassessment period to keep a taxation year from becoming statute barred. If a waiver is filed, the taxation year will remain open indefinitely, until the taxpayer files a revocation of the waiver as prescribed by subsection 152(4.1) of the Act. However, in this situation, paragraph 3 of Article 23 of the Treaty (if applicable) will override subparagraph 152(4)(a)(ii) of the Act and preclude the CRA from making certain income adjustments after the expiration of the nine-year period described in paragraph 3 of Article 23 of the Treaty. It should be noted however, that such time limitation does not apply in the case of fraud or wilful default, as indicated in paragraph 3 of Article 23 of the Treaty. This is consistent with subparagraph 152(4)(a)(i) of the Act which precludes a year from becoming statute barred where the taxpayer or person filing the return has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under the Act.
We trust our comments will be of assistance.
Lori M. Carruthers CPA, CA
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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