12 January 1987 Income Tax Severed Letter 5-2562 - [Canada-UK 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.

Employment and Immigration Canada Annuities Branch P.O. Box 12000 Bathurst, N.B. E2A 4T6

J. Thompson (613) 957-2109

Attention: A.G. Ramsay

January 12, 1987

Dear Sirs:

This is in reply to your letter of November 26, 1986 wherein you requested clarification as to whether payments made pursuant to the Government Annuities Act constitute annuities or pensions for purposes of article XVII(3) of the Canada-U.K. Tax Convention (1978).

Comments

The Government Annuities Act which was enacted by Parliament in 1908, gives as the statutory reason for its enactment that

"it is in the public interest that habits of thrift be promoted and that people of Canada be encouraged and aided therein so that the provision may be made for old age" and that "it is expedient that further facilities be afforded for the attainment of said objects."

In effect, what the Government Annuities Act does is to authorize Her Majesty acting upon the advice of Federal Ministers to enter into contracts under which payments (primarily employee contributions) are made to the Government of Canada in consideration of Her Majesty undertaking to pay annuities to these persons resident or domiciled in Canada.

There is an argument that the statutory purpose (thrift and providing for old age) could be construed as providing for retirement in the broader sense of the word and if so, these annuity arrangements can be said to constitute a form of retirement plan as contemplated in paragraph XVII(3) of the Canada-U.K. treaty. Similarly, one might then argue that since the payments received are out of a retirement plan their true nature is that of a pension rather than an annuity.

We do not agree with this argument. It is our position that given the statutory purpose of the Government Annuities Act and the terms the statute employs, payments paid out pursuant to this arrangement represent annuity payments. The sale and purchase of these annuities differs very little from the ordinary agreement of sale and purchase of annuity within a private annuity business other than the fact there is no profit element.

With respect to the specific question as to whether these payments could be considered as pensions for purposes of Article XVII(3) of the Canada-U.K. Convention, we are of the view that amounts paid out pursuant to these arrangements do not fall within the ambit of the normal definition of pension in an employer/employee context. More specifically, the payments received are not in respect of past services, based on length of employment and amount of wages or salary of the pensioner.

While the definition of pension for purposes of the Canada-U.K. tax convention is somewhat wider than the Income Tax Act, it is our opinion that a pension in these particular circumstances has certain fundamental attributes. In general terms a pension derived from employment is a deferred right to compensation which is normally (although not always) contributed to by the employer and employee, the final amount of which is usually linked to length of service and salary at the time of retirement.

In the case of the Government Annuities Act, the payments received are merely the return of the capital and interest element related to the purchase of an annuity contract.

Conclusion

Based on the comments and observations set forth above, we are of the view that amounts received pursuant to the Government Annuities Act by the annuitant or his beneficiary are not pension payments for purposes of Article XVII(3) of the Canada-U.K. tax convention but are in fact annuity payments.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch