16 May 1983 Income Tax Severed Letter

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.

May 16, 1983

K.B. Harding

XXXX

This is in reply to our letter of April 11 which was forwarded to this Division by XXXX.

XXXX

You indicated that pursuant to Article VIII you had the opportunity to choose to live in either country on a tax-free basis provided such domicile was selected before 1965.

We have reviewed Article VIII of the Canada-United Kingdom Income Tax Agreement (1946) which was in force on the date of your retire- ment. In accordance with this Article, it states that any pension paid by Canada to an individual for services rendered to Canada in the discharge of governmental functions shall be exempt from tax in the United Kingdom if immediately prior to the cessation of these services the remuneration was exempt from tax in the United Kingdom, whether under paragraph 1 of this article or otherwise, or would have been exempt under that paragraph if the present Agreement had been in force at the time the remuneration was paid. Attached is a photocopy of the particular Article.

Provided your pension qualifies under this Article, it would have been exempt from tax in the United Kingdom. Since Canada did not have a withholding tax on pensions paid to non-residents prior to 1972, it would also have been exempt from tax in Canada.

When the Canada-United Kingdom Income Tax Agreement (1966) entered into force, paragraph 2 of Article 16 carried forward the provision of Article VIII of the previous Agreement under certain circumstances. If you were in receipt of such qualifying pension, it would have continued to be exempt from tax in the United Kingdom. However, since 1971, Canada should have been withholding 25 per cent tax on the full amount of the pension paid to you while you were a non-resident of Canada.

Under the current Canada-United Kingdom Income Tax Convention (1978), the exemption provided under the 1966 Agreement was not carried forward. Accordingly, most pensions became subject to tax in the state of residence; however, the paying state also maintained its right to tax that portion of the pension payments in excess of the greater of ten thousand Canadian dollars ($10,000) or five thousand pounds sterling (5,000). In order to avoid double taxation, the country of residence is required to provide a foreign tax credit for taxes paid to the country paying the pension.

It must be remembered that income tax agreements are not static and, therefore, the taxing of any source of income may change as a result of new negotiations between the two countries.

Since Revenue Canada has no responsibility concerning the planned de-indexing of pensions, we are not in a position to respond to this comment.

We regret our reply is not more favourable and trust this explanation is adequate for your purposes.

Yours sincerely,

P. Director Provincial and International Relations Division

XXXX

KBH/jb