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: Whether pension income from the United States, received by a Status Indian residing in Canada, is taxable in Canada.
Position: Possibly. It depends on whether the employment income to which the pension relates was taxable in Canada, and whether relief from taxation in Canada is provided by the Canada-US tax Convention.
Reasons: Pension income received from a source in the US is taxable under paragraph 56(1)(a) unless it would be exempt from taxation in the US if the recipient were a resident of the US.
The Fourth Protocol amended the Canada-US Tax Convention, effective January 1, 1996, to allow the pension benefit to be taxed in the country in which the recipient lives. The entire pension must be included in income and a 15% deduction is allowed at paragraph 110(1)(f).
According to the Williams decision, income that is ancillary to employment income, such as pension income, would be exempt from taxation if the related employment income was exempt, which depends on the factors connecting the employment income to a reserve. Therefore, a Status Indian receiving pension income from the US may be exempt from taxation on pension income if the pension income relates to employment income that was exempt and there are sufficient factors connecting the pension income to a reserve.
XXXXXXXXXX 1999-000531
D. Shugar
January 25, 2000
Dear XXXXXXXXXX:
Re: Taxation of U. S. social security payments in Canada
We are writing in reply to your enquiry concerning the taxation of pension income and U.S. social security payments received by a Status Indian resident in Canada. As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).
In a telephone conversation on January 12, 2000 (Shugar\XXXXXXXXXX), you informed us that you had been employed by XXXXXXXXXX (the "Company") in the United States, and worked for the Company in the United States, for XXXXXXXXXX years. Throughout that time you resided on a reserve in Canada. You also informed us that during those years you filed a Canadian income tax return in respect of that employment income and paid tax, taking into consideration any foreign tax credit for U. S. tax deductions on the income. Upon your retirement in XXXXXXXXXX, you began receiving a company pension of $XXXXXXXXXX per month and U.S. social security benefits of $XXXXXXXXXX per month. You informed us that no taxes have ever been withheld from these pension payments and it is your position that the payments should not be taxable in Canada.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Agency.
Subject to any overriding provisions of a tax treaty, residents of Canada are taxable on their world income pursuant to subsection 2(1) of the Income Tax Act (the "Act"). This includes pension income and social security income received from a foreign country. Canadian residents in receipt of foreign pension income may be eligible to claim a tax credit against their Canadian tax in respect of taxes paid to the government of a foreign country on amounts received from a source in that country. Moreover, the Income Tax Convention between Canada and a foreign country, such as the United States, may provide relief from double taxation depending on the nature and the source of the income.
Pension income, including United States social security income, received from a source in the United States is generally taxable in Canada pursuant to paragraph 56(1)(a) of the Act. However, pension income, other than United States social security income, is not taxable in Canada if it would be excluded from taxation in the United States if the recipient were a resident thereof (paragraph XVIII(1) of the Canada - United States Income Tax Convention (1980), (the "Canada - United States Tax Convention")). We do not have sufficient information to determine whether your pension income from the United States would be exempt from tax in that country should you be a resident thereof. You should contact the payers of your pension plan to determine if any portion of your pension payment would be exempt from tax in the United States if you were a resident of that country.
United States social security income
A recent amendment to the Canada - United States Tax Convention, which came into force on December 16, 1997, means that U. S. social security benefits paid to Canadian residents will be taxable only in Canada. This change is effective as of January 1, 1996. The new rule provides that the benefit can only be taxed in the country in which the recipient lives.
Pursuant to paragraph XVIII(5) of the Canada - United States Tax Convention, only 85% of the payments received under United States social security legislation by a Canadian resident is taxable in Canada and the said payments are tax exempt in the United States. In order to qualify for that specific exemption of the Canada - United States Tax Convention, (which is reflected through a deduction in computing income pursuant to paragraph 110(1)(f) of the Act), the benefits must be payable by the United States by virtue of their Social Security Act. Among the benefits provided under the United States social security system, retirement, survivor, and disability insurance benefits under the United States Social Security Act are commonly referred to as the "social security benefits," covered by the Canada - United States Tax Convention. Where a Canadian resident receives retirement and survivors' benefits they must be included in income under subparagraph 56(1)(a)(i) of the Act.
The Indian Act and Pension Income
Under the Indian Act, the personal property, of an Indian, including income, situated on a reserve, is exempt from taxation. Prior to the Supreme Court decision in Glen Williams v. The Queen, 92 DTC 6320, employment income was considered to be situated at the location of the employer. Related payments, such as pension income including Canada Pension Plan benefits, were considered to be located at the payer's principal place of business. As the federal government is not situated on the reserve, any benefits which it paid, such as Canada Pension Plan benefits, were considered taxable to the recipient.
In the Glen Williams decision, the Supreme Court stated that in determining whether employment income of an Indian is on a reserve, the location of the employer is not the sole factor and all relevant factors connecting the income to a reserve have to be considered. The Court ruled that the proper approach to determining the situs of intangible personal property is to evaluate the various connecting factors which tie the property to one location or another. The Court also indicated that the ultimate question is to determine to what extent each connecting factor is relevant in determining whether taxing the particular kind of property in a particular manner would erode the entitlement of an Indian to personal property situated on a reserve. In CCRA's view, this approach leads to the conclusion that residency on a reserve, as a sole factor, is not sufficient to connect an individual's income to it.
In CCRA's view, the Glen Williams decision requires that income which is ancillary to employment income, such as pension income, including Canada Pension Plan benefits, be treated the same as the employment income itself. In other words, if the employment income was exempt under the Indian Act, so too would be the ancillary income. Therefore, in determining whether the two pension benefits you receive are exempt from tax, the factors connecting each particular pension to a reserve must be taken into consideration. In our view, since the employment income you received from the Company was taxable in Canada, both the company pension benefits and the U. S. social security benefits you now receive in respect of that employment, would, subject to the exception described above under paragraph XVIII(1) of the Canada - United States Income Tax Convention, be taxable in Canada as well. Based on the information provided, there are insufficient factors connecting the pension income to a reserve.
If you are retired and receive pension income there may be little or no tax withheld from these incomes and you may be required to make quarterly income tax instalments.
The installment payment options are explained in detail in Tax Pamphlet P110, "Paying Your Income Tax by Installments", available at your local Tax Services Office.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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