11 February 1986 Income Tax Severed Letter 7-0084 - []

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.

DATE: February 11, 1986

TO- Provincial and International Relations Division

FROM- Specialty Rulings Directorate Reorganizations and Non-Resident Division Alan Jane 993-7295

ATTENTION Mr. Keith Harding

RE: Proposed Commentary on Pension Benefits in Canada - U.S. Income Tax Convention, 1980

We have been asked to review the Commentary to the Canada - U. S. Income Tax Convention, 1980 (the "Convention") prepared by Non-Corporate Rulings and the Non-Resident Project Team with particular reference to the term "pensions" which, as stated on page 50 of the commentary, includes death benefits and retiring allowances.

Article XVIII of the Convention provides that pensions arising in Canada and paid to a resident of the United States may be taxed in the United States, but the amount of any such pension that would be excluded from taxable income in Canada if the recipient were a resident there is exempt from taxation in the United States. Pension income arising in Canada and paid to a resident of the United States may also be taxed in Canada according to the laws of Canada, but if the beneficial owner of a periodic pension is a resident of the United States the tax shall not exceed 15% of the gross amount of such payments.

Article XVIII(3) of the Convention defines the term "pensions" to include any payment under a pension or retirement plan. The Commentary states that the term "pensions" includes, among other things, death benefits and retiring allowances as defined in subsection 248(1) of the Income Tax Act (the "Act"). Of course, pension benefits, death benefits and retiring allowances can be paid as a lump sum or in periodic amounts. Withholding at 25% applies for pension benefits (paragraph 212(1)(h) of the Act) and the reduced rate of 15% under the Convention only applies for periodic pension payments.

Death benefits and retiring allowances are also subject to withholding at the rate of 25% (paragraphs 212(1)(j) and 212(1)(j.1) of the Act respectively). Should death benefits, retiring allowance or other pension benefits be paid in periodic amounts, the reduced rate under the Convention may apply. We are asked to provide our comments with respect to the meaning of "periodic" so as to qualify death benefits, retiring allowances and other pension benefits for the reduced rate. More specifically, we are asked whether the Department can insist that these kinds of amounts be payable over the remaining life of the recipient in order to qualify as periodic or whether some lesser period is possible. It is noted that if the period required by the Department is too short or too flexible, many such benefits that would otherwise be paid to a non-resident retiree in a lump sum amount or in periodic amounts over a long period of time may instead be paid over the shortest period allowable in order to qualify for the reduced withholding rate as periodic amounts. Such a result may well be considered absurd or unreasonable given the underlying purpose for the payment of pension benefits, i.e., to provide security for persons in later life, and may be considered a loophole causing an unnecessary loss of revenue.

In our view, the Commentary regarding pension benefits raises two fundamental questions:

1) Is it acceptable to interpret the term "pension benefits" under the Convention to include death benefits and retiring allowances?

2) Is it acceptable to require payments for life in order to qualify as "periodic pension payments"?

Dealing with the first question, there is no doubt that the term "superannuation or pension benefit" as defined in subsection 248(1) of the Act and interpreted by the Department does not include death benefits or retiring allowances as those terms are also defined in that subsection of the Act. (For example, in addition to the relevant definitions in subsection 248(1), see paragraphs 2 and 6 of IT-301

and paragraphs 3, 4 and 9 of IT-337R2 and the case of Bardsley v. M.N.R. 70 D.T.C. 1546). Under Article XVIII(3) of the Convention, however, the term pensions includes a pension or retirement plan. Thus, question 1) might be re-phrased to ask whether it is reasonable to interpret the phrase "pension or retirement plan" in the Convention so as to include death benefits and retiring allowances.

The general principles of interpretation of international conventions found in articles 31 to 33 of The Vienna Convention require that words be given their ordinary meaning in the context of the intention of the contracting parties unless such an interpretation leaves the meaning ambiguous or obscure or, leads to a result which is manifestly absurd or unreasonable. Canadian courts have observed that the terms of a treaty will override an Act and that a treaty should be construed more liberally in light of its objects and purposes. Another rule of interpretation relevant to question 1) is found in Article 111(2) of the Convention. As stated there, undefined terms in a treaty are to be given the meaning which they have under applicable domestic law (and which meaning is to be ambulatory as required by section 3 of the Income Tax Conventions Interpretation Act, S.C. 1984 c. 48).

For purposes of the Income Tax Act, the term "retiring allowance" is precluded from being a "superannuation or pension benefit". However, this is not viewed as a problem for the desired interpretation of "pension" in the Convention because the word pension is defined there to include a retirement plan and the term "retirement plan" is not defined in the Income Tax Act or other statutes of Canada. Therefore it is our view that there is nothing to prevent the term "pension", defined in the Convention as including "pension benefits and retirement plans," from being interpreted so as to include death benefits and retiring allowances. Further, it is our view that the meaning of "retirement plan" as found in everyday or common parlance in its broadest sense is a plan for securing funds during retirement. Consequently, death benefits and retiring allowances, to the extent that they contain a plan for securing funds during retirement, would form part of that plan and thus should be included within the phrase "pension benefits and retirement plans" as used in the Convention.

With regard to an interpretation of "periodic pension payment", we note that the word "periodic" is not defined in the Act or the Convention. Its ordinary or plain dictionary meaning is a payment that recurs at regular fixed intervals. If we impose the requirement that for payments to be considered as periodic pension benefits they must recur at fixed intervals for life, i.e. a life annuity, the question arises as to whether this would cause the meaning of periodic as used in the Convention to be contrary to its ordinary meaning within the general principles of interpretation of international conventions? In our view given the absurd or unreasonable result that would likely occur (as noted earlier) without such a requirement and given Canada's probable intent of not wanting to encourage pensions to be paid out to retired persons over a short period of time, the imposition of this requirement is probably a very reasonable and acceptable interpretation.

Although not directly on point, some assistance may be gained from Canadian income tax jurisprudence on a somewhat comparable amount, namely, "alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof" described in paragraphs 56(1)(b) and 60(b) of the Act. Both alimony and pensions are paid for the continuing support or maintenance of the recipient. In the case of The Queen v. Pascoe 75 D.T.C. 5427 (F.C.A.) it was held that payments under the terms of a separation agreement for all medical and educational expenses of a wife and children were not periodic in nature because these payments were not determined by the separation agreement to be at fixed recurring intervals of time. A case which deals with a more comparable aspect of the periodicity issue is The Queen v. Dorion 81 D.T.C. 5111 (F.C.T.D.). There the husband was required by a divorce decree to pay his ex-wife weekly alimony amounts and a lump sum of $20,000 in five annual installments of $4,000. The Court found that the annual payments over five years did not qualify as alimony payable on a periodic basis. In the words of the Court:

"A payment as alimony or on allowance for maintenance is linked to the duration of the life of the creditor or debtor or to the period of time during which the alimony or allowance is necessary for the recipient and can be paid by the debtor."

Would the Court's reasoning not also apply to the payment of a pension benefit? Black's Law Dictionary defines a pension plan as "a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees, or their beneficiaries, over a period of years (usually for life) after retirement". Moreover, to be registerable under the Income Tax Act, the primary purpose of a pension plan must be to Provide pensions for retired employees in the form of life annuities.

While the above arguments are in favour of an interpretation that periodic pension benefits should generally mean periodic payments for life, it is not clear that this interpretation would be legally supportable in all circumstances. For example, would periodic pension benefits include a pension plan providing benefits for life to a company president which, as part of a settlement package to induce him to resign, was commuted and paid to him over a period of five years?

The Federal Court Trial Division in Specht v. The Queen [1975] C.T.C. 126 held that such payments did qualify as periodic pension benefits within the meaning of Article VI A of the former Canada - U.S. Income Tax Convention and section 7 of the Protocol thereto. However, certain amendments have since been made to the Income Tax Act which might cause subsection 6(3) and paragraphs 115(2)(c) and 2(3)(a) of the Act to apply in those facts should this case be tried today thus possibly rendering the taxpayer in the Specht case liable to tax under Part I for income from employment in Canada rather than under Part XIII in respect of pension benefits. To date this point is unresolved.

In summary, based on a review of the material available to us, it would appear that a pension is a plan that provides the beneficiary with a periodic payment for life. It is not clear in what circumstances the law may support the position that a plan that provides for payments over some period less than life may also qualify as a pension. Thus, it is our view that the Department would be justified in taking the position that payments of death benefits and retirement allowances will generally not qualify as a pension for purposes of Article XVIII(3) of the convention, unless it involves an arrangement to provide periodic income to the payee for life. We would further suggest that any exceptions to this position be referred to this Directorate for consideration on a case by case basis. If this position were adopted, then the District Offices would forward all the relevant facts in each exceptional situation to assist us in making our determination.

We trust these comments will be of assistance.

for Director, Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch