7 February 1994 External T.I. 9401355 - U.S. PENSION RECEIVED BY CANADIAN (4093-U5-100-18)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

			940135
XXXXXXXXXX	Jim Wilson

February 7, 1994

Dear XXXXXXXXXX:

This is in reply to your enquiry made at the Toronto District Office on December 31, 1993, in which you requested our comments concerning the taxability of certain pension income. You have been a resident of Canada since

XXXXXXXXXX

According to the information provided, you made contributions to a U.S. pension plan while employed by the U.S. Embassy in XXXXXXXXXX Upon your retirement in XXXXXXXXXX, you were not entitled to receive benefits from that plan until a later date. You have recently received a partial refund of your premiums made to that plan (i.e. a lump sum payment) and you wish to know the Canadian tax implications thereof. Also, you want to know whether the interest element in the lump sum payment (i.e. the amount received over and above your return of premiums) can be allocated and reported in the years such interest was earned in the pension plan. You have also begun to receive periodic pension payments from the U.S. pension plan. You are of the understanding that the lump sum payment and the periodic pension payments from such a pension plan, because they relate to employment in a U.S. Embassy, would have been exempt from U.S. tax had they been received by a U.S. resident.

Our Comments

As a Canadian resident you are generally required to include in your income all amounts received as a "superannuation or pension benefit" regardless of whether those payments arise inside or outside Canada. Section 248 of the Income Tax Act defines "superannuation or pension benefit" to include:

"any amount received out of or under a superannuation or pension fund or plan and without restricting the generality of the foregoing includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder,

(a) in accordance with the terms of the fund or plan,
(b) resulting from an amendment to or modification of the fund or plan, or
(c) resulting from the termination of the fund or plan;"

Whether payments received from the U.S. pension plan are in the form of a lump sum payment or a periodic pension payment, or whether such payments include a return of premiums and/or an income element, such payments, in their entirety, are to be included in your income in the year they are received.

In your situation, however, the Canada-United States Income Tax Convention ("Convention") may affect Canada's right to tax such income. Paragraph 1 of Article XVIII of the Convention is worded as follows"

"Pension and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State."

It is our understanding that the United States would not tax its residents on the portion of a pension payment that is a refund of the premiums of a beneficiary (i.e. a return of capital). Accordingly, the portion of your U.S. pension payment, whether that payment is a lump sum payment or periodic pension payment, that is a refund of premiums is deductible in computing your taxable income in Canada (line #256 of the Canadian T1 tax return) as treaty-exempt income. We are not aware whether the remaining portion of your U.S. pension benefits would have been exempt from U.S. income tax because they were in respect of services performed at a U.S. Embassy.

In order for the Department to grant treaty-exemption for the portion of your U.S. pension benefits that represent a return of premiums, we would require a breakdown from the plan. Also, before the Department would grant treaty-exemption on any other portion of the pension benefit, we would require a letter from the U.S. tax authorities confirming that such other portion should be exempt from Canadian tax in accordance with paragraph 1 of Article XVIII of the Convention.

In the event the United States withhold income tax on any portion of the pension payments made to you, such tax would be eligible for a foreign tax credit on your Canadian tax return.

We trust this information will be assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs BranchYours truly