20 October 2010 External T.I. 2010-0377821E5 - Part XIII tax on pensions, severance, annual leave

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.

Principal Issues: 1- Does Part XIII tax apply to pension and severance payments paid to a non-resident by a Canadian resident? 2 - Does Part XIII tax apply to annual leave credits paid to a non-resident by a Canadian resident? 3- Is Part XIII tax paid on gross receipts or are deductions permitted?

Position: 1 - Yes; 2 - No; 3 - On gross amounts

Reasons: 1 - In accordance with paragraphs 212(1)(h) and (j.1), Part XIII tax is applicable on pension and severance payments paid by a Canadian resident to a non-resident, unless the individual qualifies for one of the listed exemptions. 2 - The annual leave credit payment is subject to income tax under paragraph 115(1)(a) of the Act and not subject to Part XIII withholding tax. 3 - In accordance with subsection 214(1) of the Act, Part XIII tax is applicable on gross amounts paid.

XXXXXXXXXX
									2010-037782
									P. Waugh
October 20, 2010

Dear XXXXXXXXXX :

Re: Part XIII Withholding Tax

I am writing in response to your letter of August 13, 2010 concerning Part XIII withholding tax. More specifically, you have enquired whether the 25% Part XIII withholding tax applies to your pension income, severance payment, and payout of annual leave credits. Further, if Part XIII tax applies to the pension payment, you asked whether it applies on the gross amount or if deductions are permitted.

In the situation you described, you have been a non-resident of Canada for the past XXXXXXXXXX years, living and working for the XXXXXXXXXX in the Kingdom of Bahrain. You own rental property in Canada for which you file an annual tax return under Section 216 of the Income Tax Act (the "Act"). When you were living in Canada, you were employed by a Canadian employer where you accumulated pension benefits which you will be entitled to receive at age 55. You also accumulated annual leave credits and are entitled to severance pay, both of which have yet to be paid due to an outstanding grievance.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

(a) Pension Payment

Part XIII is a tax on gross amounts paid or credited by Canadian residents to non-residents, arising from sources other than personal employment or the carrying on of business. Paragraph 212(1)(h) of the Act requires that Part XIII tax be withheld, at a rate of 25%, on superannuation or pension payments to a non-resident that would be taxable if the payment had been received by a resident of Canada. However, no withholdings are required if the payment falls within one of the exemptions listed in paragraph 212(1)(h). We suggest you seek professional advice to determine if you fall under one of these exemptions, especially if the pension payments will be directly transferred to a Registered Retirement Savings Plan, a Registered Pension Plan, or a Registered Retirement Income Fund.

(b) Severance Payment

Where a retiring allowance is paid by a person resident in Canada to an individual who is a non-resident of Canada, paragraph 212(1)(j.1) of the Act provides that such amount is subject to a 25% withholding tax under Part XIII of the Act unless the payment may reasonably be regarded as attributable to services rendered by the person in taxation years during which the person was not at any time resident in Canada, and throughout which the person was not employed, or was only occasionally employed, in Canada. Retiring allowance is defined in subsection 248(1) of the Act (and discussed in Interpretation Bulletin IT-337R4, Retiring Allowances (Consolidated)) to be an amount received on or after retirement from an office or employment in recognition of a taxpayer's long service or a payment in respect of a loss of office or employment. The severance payment would likely qualify as a retiring allowance and generally would be subject to the 25% withholding tax.

(c) Treaty

The Part XIII withholding tax requirement is subject to possible relief under an income tax treaty that Canada may have with the country of residence of the recipient of the payment. Since Canada does not have a tax treaty with the Kingdom of Bahrain, there is no relief available.

(d) Annual Leave Payout

Accumulated unpaid leave paid to an employee is included in taxable income earned in Canada by virtue of subparagraph 115(1)(a)(i) to the extent that the duties of employment related to that payment were performed in Canada. Since the unpaid leave is remuneration related to services performed while a resident of Canada, it will be subject to tax under paragraph 115(1)(a) of the Act when paid instead of being subject to Part XIII withholding tax. As such, you are required to include this employment income on a non-resident Canadian tax return required under Part I of the Act.

(e) Section 217 Election

In accordance with section 217 of the Act, an individual subject to Part XIII tax can elect to report certain types of income, including pension income and some severance payments on a tax return for taxation under Part I of the Act. If the election is made, pension and severance payments would be added to an individual's taxable income earned in Canada as determined under paragraph 115(1)(a) of the Act It should be noted that a return reporting a non-resident's taxable income earned in Canada is separate from a return filed under section 216 of the Act. For more information on electing under section 217 of the Act, please refer to CRA guide T4145, Electing Under Section 217 of the Income Tax Act.

It should be noted that a section 217 election does not relieve a non-resident from Part XIII withholding tax. The payor is still required to withhold the 25% tax, unless the non-resident applies for a reduction in the amount of tax required to be withheld and CRA approves the request. The request is made by filing Form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld. Any Part XIII tax withheld and remitted to CRA is reported on line 437 of the T1 return.

We trust these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch