5 August 1997 External T.I. 9716555 - PENSION, FOREIGN EMPLOYEE, TAXES

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.

Principal Issues:

Can part of a pension paid to a non-resident be exempt from paragraph 212(1)(h)?

Position:

Yes

Reasons:

The amounts relating to the period that the employee was not resident and either not employed in Canada or only occasionally employed in Canada.

	                               	971655
XXXXXXXXXX                            	M.P. Sarazin

Attention: XXXXXXXXXX

August 5, 1997

Dear Sir:

Re: Pension Plan Receipts and Withholding Taxes

This is in reply to your facsimile dated April 8, 1997, wherein you requested a ruling regarding the amount of tax that will have to be withheld by your employer's pension plan with respect to pension payments that will commence to be paid to you in Belgium as of XXXXXXXXXX.

Comments

An advance income tax ruling will only be provided where the taxpayer's ruling request complies with all of the requirements of Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, Customs, Excise and Taxation. We are enclosing a copy of Information Circular 70-6R3. Since your request does not comply with the Information Circular, we can only provide you with the following general comments.

Interpretation Bulletin IT-76R2 reflects the Department's views with respect to the determination of what portion of pension benefits paid to non-residents of Canada is exempt from withholding tax at source under paragraph 212(1)(h) of the Income Tax Act (the "Act"). Paragraph 2 of IT-76R2 states that pension benefits paid after 1979 in respect of a person who was throughout any particular calendar year not employed in Canada (or only occasionally employed in Canada) and not resident in Canada, the portion of such benefits that may reasonably be regarded as attributable to services rendered in such year(s) is not subject to non-resident tax. Paragraph 3 of IT-76R2 provides you with formulas that may be used in the determination of a reasonable allocation between exempt and non-exempt periods for defined benefit pension plans and money purchase pension plans. There is no relief under the Canada-Belgium Tax Convention in respect of pension payments to a resident of Belgium which are subjected to tax under paragraph 212(1)(h) of the Act.

Prior to July 31, 1997, where the conditions in paragraph 254(a) were satisfied, an individual's pension entitlements could have been used to acquire an annuity contract and payments under the annuity contract were considered pension payments. As a result of proposed amendments announced July 31, 1997, paragraph 254(a) will only apply to contracts entered into before July 31, 1997 and section 147.4 will now provide for the acquisition of an annuity contract with pension entitlements. Payments under the annuity contract will be deemed to be received out of the registered pension plan. In determining the amount that would be subject to paragraph 212(1)(h) of the Act, we refer you to the previous paragraph.

Under the provisions of subsection 147.3(1) of the Act, an individual's entitlements under a money purchase provision of a registered pension plan may be transferred, tax-free, to a registered retirement savings plan ("RRSP"). Under the provisions of subsection 147.3(2) of the Act, an individual's entitlements under a defined benefit provision of a registered pension plan may be transferred, tax-free, to an RRSP. The provisions of paragraph 212(1)(l) require that a 25% tax be withheld from the full-amount of the RRSP payments. Consequently, the pension benefits relating to the calendar years where the individual was not employed or resident in Canada would become subject to the 25% tax if the pension entitlements are transferred to an RRSP.

The term "locked-in RRSP" has no meaning under the Act. A locked-in RRSP is an ordinary RRSP which is subject to a locking-in agreement attached to the RRSP contract which requires that the RRSP be held to provide a periodic pension income to the annuitant after reaching a certain age. This requirement is not imposed by the Act, but by the relevant provincial or federal pension standards legislation.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

ENCLOSURE