8 November 1988 Income Tax Severed Letter 7-2924 - [Foreign Annuity or Pension Benefit]

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.

NOV 8 1988

Specialty Rulings Directorate O. Laurikainen (613) 957-2125

SUBJECT: Foreign Annuity or Pension Benefit

This is in response to your memorandum of May 31, 1988 in which you enquired about the Canadian tax treatment of South African pension or annuity receipts which a taxpayer wishes to roll-over into a registered pension plan.

The Canada-South Africa Income Tax Agreement (1956) was terminated September 23, 1985 effective in Canada for taxation years ending in 1986 and subsequent years. Accordingly, the Canadian tax treatment of such receipts will be governed solely by the provisions of Canadian Income Tax Act (the "Act"). Having reviewed the information provided by the taxpayer, we find that it is deficient with respect to three items:

A) References to "Professional and Executive Retirement Annuity Fund" and "Early Retirement" imply that the funds received are from a superannuation or pension plan, but we should get more information to ensure that these do in fact fall under the definition of superannuation or pension benefit found in subsection 248(1) of the Act. However, as the information provided strongly suggests that receipts would fall under the definition of "superannuation or pension benefits" we suggest that they be treated as such until such time as the taxpayer can establish otherwise.

B) If any funding was done by XXXX employer or former employer, the plan would fall under the definition of "employee benefit plan" which is found in subsection 248(1) of the Act.

C) We need to determine where XXXX was resident at XXXX when the annuity was purchased and the commutation was received.

Our discussion will deal with Canadian taxation of both "superannuation or pension benefits" and amounts received from "employee benefit plans" which are not pension plans.

"Superannuation or pension benefits"

Paragraph 254(a) of the Act provides that where the rights established under a pension plan call for the purchase of an annuity and the payments out of the annuity are made in accordance with such rights, any payment from the annuity would be deemed to be out of a superannuation or pension plan and the amount used to buy the annuity would be deemed not to have been received. Accordingly, if the plan is a superannuation or a pension plan, the annuity receipts and the cash commutation would be included in income pursuant to subparagraph 56(1)(a)(i) of the Act provided they were received by XXXX at a time when he was resident in Canada. Such income is permitted a "rollover" under the provisions of paragraph 60(j) of the Act. Any amounts received prior to the time XXXX became a resident, would not be subject to taxation in Canada.

Receipts from an "employee benefit plan"

If the receipts are not "superannuation or pension benefits" but can be considered to be from an "employee benefit plan", the total fund including the commutation would be brought into employment income pursuant to paragraph 6(1)(g) of the Act when the annuity is purchased and the commutation is received (XXXX as the annuitant is considered to have received the amount used to purchase the annuity). Any portion of the above amounts which can be considered a return of amounts contributed to the plan by XXXX would be tax exempt pursuant to subparagraph 6(1)(g)(ii) of the Act. No roll-over would be available under paragraph 60(j) of the Act. If XXXX was not resident in Canada when plan was converted into annuity, Canada would have no right to tax the transaction.

The annuity payments would be included in income pursuant to paragraph 56(1)(d) of the Act. A deduction equal to the capital element of each annuity payment included by virtue of paragraph 56(1)(d) of the Act, would be available under subparagraph 60(a)(i) of the Act. The capital element would be calculated pursuant to guidelines set out in regulation 300(1) of the Act. If XXXX became a resident after the annuity was purchased, the capital element would be calculated pursuant to subsection 48(3) of the Act.

A non-business foreign tax credit under subsection 126(1) of the Act and a deduction under subsection 20(12) of the Act may be available under either of the above alternatives if these receipts are subject to tax in South Africa.

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