12 August 2010 External T.I. 2010-0371131E5 - Payment from UK government pension plan

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) Is a UK pension paid to a Canadian resident subject to income tax? (2) What are the tax implications of not previously reporting this income? (3) How should this income be reported on previously assessed tax returns?

Position: (1) Yes, unless specifically excluded from income under the Act or the Canada-UK Income Tax Convention. (2) Interest and penalties may be assessed on the unpaid tax liability. (3) Amendments to tax returns can be made using form T1 Adjustment Request. To avoid possible penalties, the information can be reported using CRA's Voluntary Disclosure Program.

Reasons: (1) The UK pension payment made to a Canadian resident would be subject to income tax under subparagraph 56(1)(a)(i) of the Act. (2) In accordance with subsection 152(4), CRA can reassess beyond the normal reassessment period if the taxpayer has made misrepresentation. Pursuant to section 161 of the Act, interest is assessed on any unpaid liability. (3) The Voluntary Disclosure Program encourages taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, without penalty or prosecution.

XXXXXXXXXX
							2010-037113
							P. Waugh
August 12, 2010

Dear XXXXXXXXXX :

Re: Payment from UK Government Pension Plan

I am writing in response to your email of June 14, 2010 wherein you requested our comments on whether a pension received from the United Kingdom ("UK") government is subject to Canadian income tax.

You advise that the taxpayer is a Canadian resident receiving a UK government social security pension which is a general UK government pension paid to citizens of the UK similar to the Canada Old Age Security pension. The UK pension is not a war pension and is deposited into a bank account in the UK. It is unknown whether withholding tax has been paid to the UK government. The taxpayer has not been including the UK government pension in income for Canadian tax purposes.

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.

Canadian residents are generally required to include in their income all amounts received as a "superannuation or pension benefit" in accordance with subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"). A "superannuation or pension benefit" includes any amount received out of a superannuation or pension fund or plan. Generally, a plan will be considered a superannuation or pension fund or plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payments on or after the employee's retirement in consideration for his or her employment services. Subparagraph 56(1)(a)(i) of the Act applies to benefits from a foreign pension plan that are attributable to services rendered while the individual was not a resident of Canada. A "superannuation or pension benefit" also includes a periodic payment by government to persons above a specific age (old-age pension) or disabled or widowed.

In general terms, where a resident of Canada receives an amount out of a UK pension plan that qualifies as a pension plan for purposes of the Canadian Act, the full amount received, before withholding taxes, is taxable under subparagraph 56(1)(a)(i) of the Act unless a specific provision of the Act or the Canada-U.K. Income Tax Convention (the "Convention") applies to exclude the amount.

It should be noted that paragraph 81(1)(e) of the Act exempts pension payments received on account of death or disability arising out of a war from a country that was an ally of Canada. You have indicated that the UK pension is not a war pension and therefore it would appear that this exemption does not apply.

Under paragraph 1 of Article 17 of the Convention, periodic pension payments arising in the UK and paid to a resident of Canada are only taxable in Canada and there should be no withholding tax in the UK on such payments. Should taxes have been withheld in error from the UK pension payment, no foreign tax credit would be available to the Canadian resident in respect of the withheld amount of tax since such withholding would have been inconsistent with the Convention. If this is the case, application should be made to the UK HM Revenue and Customs (http://www.hmrc.gov.uk/incometax/refund-reclaim.htm) for a refund of the tax. For additional details on the foreign tax credit rules, please refer to Interpretation Bulletin IT-270R3, Foreign Tax Credit.

As a general rule, subsection 152(4) of the Act authorizes CRA to reassess within three years from the date of the original assessment. However, pursuant to subparagraph 152(4)(a)(i) of the Act, CRA may reassess an individual's T1 Return beyond this three year period if the taxpayer "has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud" in filing his/her return of income or in supplying any information under the Act. A misrepresentation has occurred if there is an incorrect statement on the tax return that is material to the purposes of the return and to any future reassessment

When a taxpayer notifies CRA that a previous return needs to be amended to include additional income, the taxpayer will be assessed interest on any outstanding balance owing to CRA. While amendments to previously filed returns can be made on form T1 Adjustment Request, in order to avoid any possible penalties, the best way to notify CRA of the additional income is through a voluntary disclosure.

CRA's Voluntary Disclosures Program ("VDP") is designed to encourage taxpayers to come forward and correct inaccurate or incomplete information or to disclose information that has not been reported during previous dealings with the CRA, without penalty or prosecution. However, it should be noted that relief from penalties would only be granted to any taxation year that ended within the previous 10 years before the calendar year in which the voluntary disclosure submission is filed and where full disclosure is made. If a taxpayer wants to make a voluntary disclosure, he/she should complete form RC-199, Voluntary Disclosures Program (VDP) Taxpayer Agreement and attach it to the disclosure submission with any supporting documentation. It is important for a taxpayer to indicate clearly, on any disclosure made, that he/she is submitting information under the VDP.

A taxpayer can complete and submit the RC-199 form or have an authorized representative do so on his/her behalf. A submission must be in writing and mailed or faxed to the Tax Services Office that has jurisdiction over the area where the taxpayer resides. For more details, and to see if a disclosure qualifies for this program, see Information Circular IC00-1R2, Voluntary Disclosures Program or call 604-587-2022 or 1-800-959-8281.

We trust that these comments are of assistance.

Yours truly,

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