1 March 1999 External T.I. 9829665 - PENSION INCOME RECEIVED FROM GERMANY

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: Taxation of pension income received from Germany

Position: Provided a general explanation of the relevant provisions of the Act and the treaty.

Reasons: Required basic material on topic.

XXXXXXXXXX 		982966
W. C. Harding
March 1, 1999

Dear Sirs:

Re: Income from Foreign Sources

This is in reply to your letter of November 10, 1998, in which you requested clarification of the taxation of amounts received by a Canadian resident from a source in the Federal Republic of Germany (“Germany”) where the amounts are received as a consequence of the death of the individual’s spouse. You described the first amount as a lump sum payment and the second as a spouses pension.

Because your enquiry deals with a factual situation, we are unable to provide specific comments. However, we can provide the general information that follows below which may or may not apply to your situation. Should you require further assistance with respect to the particular facts of your case, you should refer these to the tax services office for the individual involved for their consideration and comment.

The taxation of “death benefits” is explained in the enclosed Interpretation Bulletin IT 508R. As noted in the Bulletin certain amounts may or may not qualify as death benefits for the purposes of the Income Tax Act (the “Act”). In particular an amount paid out of a pension plan will not qualify as a death benefit but will be taxable in whole as a pension benefit. Accordingly, the Department would require specific information with respect to any particular amount before the nature of the payment could be determined.

Generally the definition of a death benefit, as found in subsection 248(1) of the Act, will apply to an amount received by a Canadian resident on or after the death of an employee in recognition of the employee’s service in an office or employment where the amount is paid by a non resident employer of the deceased employee. The provision will apply even though the employee was not a resident of Canada at any time. This means that the resident recipient would be entitled to reduce the taxable portion of the amount by all or a portion of the $10,000 reduction provided in the definition to the extent permitted therein.

With respect to pension benefits, both periodic and lump sum amounts received by a resident of Canada out of a pension of an employer resident in Germany should be included in the Canadian recipient’s income as provided under paragraph 56(1)(a) of the Act. However, the Income Tax Agreement and Protocol between Canada and Germany (Schedules I and II to the Canada Germany Tax Agreement Act 1982) does provide exceptions for certain pensions with their source in Germany. In particular, subparagraph 3(b) and 3(c) of Article 18 of the Agreement provide that:

“(b) periodic or non-periodic payments received from the Federal Republic of Germany, or a “Land” or a governmental instrumentality thereof as compensation for an injury or damage sustained as a result of hostilities or past political persecution shall be taxable only in the Federal Republic of Germany; [and]

(c) benefits under social security legislation in a Contracting State [i.e. Germany] paid to a resident of the other Contracting State shall be taxable only in the first mentioned State”.

While it appears the pension benefits you are considering are not covered by these provisions, you may wish to verify that this is the case.

We trust this information will be of assistance.

Yours truly,

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