25 November 2002 Internal T.I. 2002-0125907 - PENSIONS AND ANNUITIES

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 CCRA.

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

Principal Issues:

How are annuity and superannuation payments arising in Australia taxed in the hands of a recipient Canadian resident?

Position: Based on the limited information available, the total amounts received are taxable.

Reasons:

Under Article 18 of the Canada-Australia Income Tax Convention, there is no relief for amounts that would not have been subject to Australian tax if the recipient were a resident of Australia. Also, the payment is not from a foreign retirement arrangement.

			November 25, 2002

	PENTICTON TAX SERVICES OFFICE 	HEADQUARTERS
			Income Tax Rulings
	Attention:  Gord McDougall	  Directorate
G. Kauppinen
(613) 957-8971

			2002-012590

Pensions/Annuities received from Australia

This is in reply to your e-mail dated February 28, 2002 wherein you requested our comments regarding a Canadian taxpayer who has received amounts from a deferred annuity sourced to Australia.

Facts

1. The taxpayer worked in Australia for a number of years for XXXXXXXXXX.

2. During his working years, the taxpayer made annual contributions to the XXXXXXXXXX Superannuation scheme.

3. The taxpayer retired at the end of XXXXXXXXXX.

4. At that time, the taxpayer opted to commute all of his superannuation into a lump sum "eligible termination payment" (Australian terminology) (the "ETP").

5. Under Australian law, each ETP has to be broken down into seven different components, each of which is taxed differently depending upon the law in effect at the time. For example, only 5% of the "Pre-June 1983 component" is included in "assessable income" for Australian income tax purposes.

6. Most of the ETP came from the "Pre-June 1983 component".

7. The taxpayer elected to roll-over the ETP into a "Deferred Annuity" (a tax-deferred transfer for Australian income tax purposes).

8. When the taxpayer makes withdrawals from the deferred annuity, under Australian law, each withdrawal is broken down into the same seven components described in 5 above.

9. In XXXXXXXXXX, the taxpayer became a permanent resident of Canada and subsequently began receiving payments from the Australian deferred annuity.

Your Query

How are the payments described in 9 above taxed in Canada given that had the taxpayer received these payments while a resident of Australia, a large part of the payment would have been exempt from Australian tax because it was mostly from the "Pre-June 1983 component" (which is 95% exempt from Australian income tax).

Our Comments

Paragraph 1 of Article 18 of the Canada-Australia Income Tax Convention states as follows:

Pensions and annuities arising in a Contracting State for the benefit of and paid to a resident of the other Contracting State may be taxed in that other State.

There is no other provision in the Canada-Australia Income Tax Convention which would exempt from Canadian income tax that portion of the payment that would have been exempt from Australian income tax had the taxpayer received the payment while a resident of Australia.

In contrast, paragraph 1 of Article 18 of the Canada-U.S. Income Tax Convention reads as follows:

Pensions 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.

Based on the limited information available, in the absence of any relieving provision under the Canada-Australian Income Tax Convention, the total amount received, if it is an annuity payment, is taxable under paragraph 56(1)(d) of the Income Tax Act ("Act"). (Note that the relief provided under Clause 56(1)(a)(i)(C.1) of the Act for amounts not subject to tax if the recipient were a resident in the source country would not be available in this situation because the payment would not be from a foreign retirement arrangement. The only foreign retirement arrangements currently prescribed by section 6803 of the Income Tax Regulations are U.S. Individual Retirement Arrangements.)

Roberta Albert, CA
Manager
Deferred Income Plans Section
Income Tax Rulings Directorate