7 November 1990 Income Tax Severed Letter - Canada-Italy Tax Convention

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.

Subject: Canada-Italy Tax Convention (the "Convention")

We have been asked to reply to your memorandum of July 24, 1990 to Christine Savage, Acting Director, Provincial and International Relations Division concerning Article XVIII of the Convention which deals with pension receipts.

In accordance with Article XVIII of the Convention, pension payments arising in Canada and paid to a resident of Italy may only be taxed in Canada to the extent that the total of such payments in the particular year exceeds ten thousand Canadian dollars or twelve million Italian liras, whichever is greater. The excess amount referred to is subject to tax at a rate of 25% but the tax is limited to the lesser of a) 15% of the gross amount of the pension payments in the year and b) the tax that the recipient would otherwise be required to pay for the year in respect of the total amount of periodic pension payments received by him in the year if he were resident in Canada. It is our view that this exemption is to be applied in respect of those payments which would otherwise have been subject to withholding tax pursuant to Part XIII of the Income Tax Act. Certain pensions are not subject to the withholding tax and, accordingly, are not taken into account in applying this exemption (e.g., pension or supplement under the Old Security Act or benefits under the Canada or Quebec Pension Plan).

For purposes of calculating any relief under the Convention from taxes payable in Canada under paragraph 1(a) and (b) of Article XVIII, the tax referred to in paragraph (b) is the tax that would be determined on the elective filing by the non-resident of a T1 return pursuant to the provisions of section 217 of the Income Tax Act. The elective filing entitles the non-resident to claim certain personal and other exemptions but subjects him to the tax rates that are applicable to Canadian residents. In addition, for purposes of the elective return, benefits under the Canada or Quebec Pension Plan or pension or supplement under the Old Age Security Act must be included and the $10,000 exemption in respect of pension income provided for in Article XVIII may be claimed pursuant to subparagraph 110(1)(f)(i) of the Income Tax Act.

Subparagraph 110(1)(f)(i) provides a deduction in computing taxable income for an amount exempt from income tax in Canada by virtue of a provision in a tax convention or agreement with another country that has the force of law in Canada.

In summary for purposes of Article XVIII of the Convention, the calculation of the excess amount for purposes of the exemption and the gross amount referred to in paragraph 1(a) excludes certain pensions that are not subject to Part XIII tax. The base rate applicable on pensions in excess of ten thousand Canadian dollars to twelve million Italian liras whichever is greater, is 25%. With respect to the calculation in paragraph 1(b) total pension income must be included.

In respect of your comment about the non-resident section not issuing an assessment for failure to deduct under your restrictive definition of pension income, we refer you to paragraph 83 of IC77-16R3 [Information Circular 77-16R3] which states that a non-resident receiving pension income may apply for a reduction in the amount of non-resident tax required to be withheld.

With respect to your all inclusive definition of pensions, given our comments above on the elective filing under section 217 of the Income Tax Act and inclusions for purposes of paragraphs 1(a) and (b) of Article XVIII of the Convention, it would appear that under both of your scenarios the taxpayer in question would be entitled to a refund. Please refer to the attached schedule for details.

We hope our comments will be of assistance to you.