28 May 1987 Income Tax Severed Letter 5-3340 - [Paragraph 15.1(3)(f) and SBDBs]

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.

Dear Sirs:

This is in reply to your letter of April 13, 1987 regarding the taxation of pension benefits to be received from a Canadian company pension plan in respect of which you made contributions in part with tax-paid dollars while living in the United States.

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You inquire as to whether you may obtain a credit in Canada for the U.S. tax paid on the pension plan contributions and how benefits out of the plan should be treated for income tax purposes in order to avoid double taxation. As you have not indicated what your residency status will be when the pension benefits are received, we will answer your question based on separate assumptions of both Canadian and U.S. residency.

In the case of a resident of Canada, subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act") provides that pension benefits received in the year must be included in income. This applies whether or not amounts contributed to the pension plan were deductible from income and whether or not the pension plan is a registered plan.

In the case of a non-resident recipient of pension benefits arising in Canada, the general rule as provided for in paragraph 212A(1)(h) of the Act is that all such benefits are subject to a non-resident withholding tax in Canada of 25% of the gross amount of such payments. In the case of periodic pension benefits arising in Canada and paid to a U.S. resident who is the beneficial owner of such payments the withholding rate is reduced to 15% pursuant to Article XVIII(2)(a) of the Canada-U.S. Income Tax Convention (1980). However, paragraph 212(1)(h) of the Act may provide for an exemption from non-resident withholding tax with respect to a portion of the pension benefits.

The exemption referred to in paragraph 212(1)(h) of the Act is generally with respect to the portion of the pension that may reasonably be attributable to services rendered while the taxpayer was not resident in Canada. In more precise terms, where pension benefits are paid in respect of a person who was throughout any particular year not employed in Canada (or only occasionally employed in Canada) and not resident in Canada, the portion of such benefits that may reasonably be regarded as attributable to services rendered in any such year is not subject to the non-resident withholding tax.

In cases where this exemption applies, it is necessary to determine the taxable portion of each pension payment. This determination is based on a reasonable allocation of the pension payment as between the resident and non-resident years of pensionable service of the employee in respect of whom the payment is made. For further information regarding the exempt portion of a pension and for an acceptable formula for the allocation please consult Interpretation Bulletin IT-76R2, a copy of which is enclosed herein.

We trust this will be of assistance.