Article 18 - Pensions and Annuities

How is the tax treatment of RRSP payments (either periodic or in a lump-sum) or RRIF payments made to non-residents in New Zealand affected by the new Canada-New Zealand Treaty? CRA stated:

It should be noted that under the definition of "periodic pension payment" in section 5 of the [Income Tax Conventions Interpretation Act], neither a payment from an RRSP before maturity or in full or partial commutation of the retirement income under an RRSP (such as a a fixed or single lump-sum payment from your RRSP annuity that is equal to the current value of all or part of your future annuity payments from the plan), or a payment from a RRIF that exceeds either twice the minimum payment or the 10% threshold, is considered to be a "periodic pension payment". …[eligible for the15% reduced rate].

In addition, since the Current Treaty and the New Treaty have pension and annuity provisions, then the pension provision, as the more specific provision, is considered to apply and, by extension, a periodic pension payment would not be considered to be an annuity.

A Canadian resident employee, after qualifying for benefits under the unfunded long term disability plan ("LTD Plan") of the Canadian resident employer, becomes a resident of the U.S. Under the terms of the Plan, the employee is not required to fulfill any duties of employment and will continue to receive benefits until the earlier of rehabilitation and commencement of benefits under the employer pension plan. Would Part XIII withholding apply? CRA stated:

[T]he LTD Plan payments would be salary, wages or other remuneration…because they would be amounts arising out of the employment relationship. … As such… withholdings under Part XIII would not be applicable… [and] the LTD Plan payments would be subject to withholding under paragraph 153(1)(a)… .

While the LTD plan payments would be taxable as income from employment for purposes of the Act, such income would be considered as being pension income for the purposes of applying the provisions of the Convention. This is due to the fact that paragraph 3 of Article XVIII (Pensions and Annuities) of the Convention defines the term "pensions" as including any payment under a sickness, accident or disability plan (i.e., the LTD Plan). Consequently, one must refer to the provisions of Article XVIII of the Convention rather than those of Article XV (Income from Employment)… .[A] U.S. resident employee receiving LTD Plan payments could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII… .

As "pension" was not defined in the Canada-Poland Treaty, s. 5(a) of the Income Tax Conventions Interpretation Act applied, so that all of the RPP, RRSP, OAS, CPP and QPP payments made to the Taxpayer (a former Canadian who became a Polish resident) were to be considered "pensions" for the purposes of the Treaty. In light of the definition of "periodic pension payments" in . 5(a):

a payment from an RRSP before maturity or in full or partial commutation of the retirement income under an RRSP…is not considered to be a "periodic pension payment" [and] such a payment to the Taxpayer would not be eligible for a reduced rate of withholding tax under the Treaty… .

Although income earned in a UK Cash ISA is not subject to taxation in the U.K., under the Canadian Income Tax Act ("Act") Canadian residents ... must report their worldwide income, including income earned on investments held in the U.K., for Canadian tax purposes. As such, the interest received or receivable in the year from the investments in a UK Cash ISA must be included in a Canadian resident's income tax return pursuant to paragraph 12(1)(c) of the Act.

CRA also indicated that neither Article 11 nor Article 17 of the Canada-UK Convention would apply to relieve taxation. (Article 17 is equivalent to Art. XVIII of the Canada-US Convention.)

A Roth IRA is not a registered plan under the ITA, but Article XVIII will generally apply to distributions to a Canadian resident individual out of a Roth IRA if the distribution would be excluded from income tax if paid to a US resident.

Under paragraph 7 of Article XVIII, a Canadian resident individual may also elect to defer taxation in Canada on any income accrued in a Roth IRA until a distribution is made from the plan.

Respecting the payment of a Belgian pension to a Canadian resident, CRA stated (TaxInterpretations translation):

Thus, to the extent that the retirement pension of a recipient satisifes the conditions stated in paragraph 1 of Aricle 18 of the Convention and does not consititue a payment by virtue of social security legislation of Belgium, the sum received by the Canadian taxpayer is taxable in Canada and in Belgium....If, on the other hand, the sum is paid under social security legislation of Belgium, it will not be taxable except in Belgium. The payment will be required to be included in the income statement of the Canadian taxpayer, but the taxpayer will benefit from a deduction in an equivalent amount under subaragraph 110(1)(f)(i).

Discussion of treatment of German social security pensions including link to discussion at www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/grmny2005-eng.html. CRA states:

a recipient of a qualifying retroactive lump-sum payment exceeding $3,000 can ask the CRA to tax the parts (not including interest) received as a lump-sum payment as if they had received them in the years to which they relate using Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment. The CRA will apply this calculation to the parts that relate to years throughout which the taxpayer was resident in Canada, if the total of those parts is $3,000 or more (not including interest) and the result is better for the taxpayer.

An individual who converts a traditional US Individual Retirement Account ("IRA") to a Roth IRA is allowed under the Code to spread the resulting income inclusion over the following two taxation years.

CRA confirmed that there is no such allowance under Canadian tax law, and the entire converted amount is treated as a distribution from the IRA and will be included in the year of the conversion, pursuant to s. 56(1)(a)(i)(C.1). CRA stated:

Pursuant to paragraph 1 of Article XVIII of the Convention, amounts received from a traditional IRA by a Canadian resident may be taxed in Canada. However, as an exception, amounts that would be exempt from taxation in the U.S. if paid to a U.S. resident may not be taxed in Canada. In the case at hand, the 2010 conversion amount is not exempt from taxation in the U.S., as the taxation of this amount is simply being deferred. Consequently, the Convention does not apply to prevent the 2010 conversion amount from being taxed in Canada.

CRA noted, however, that "in many cases, Article XVIII of the Convention may apply to either defer or relieve taxation in Canada." Income Tax Technical News, No. 43 describes CRA's position on Roth IRAs in more detail.

It is unnecessary for a Canadian-resident individual to file an election under Art. XVIII(7) of the Canada-US Convention to defer recognition of income on investments in a US Individual Retirement Account because the Act already provides such deferral:

Under clause 56(1)(a)(i)(C.1) of the Act, an individual is required to include amounts under a foreign retirement arrangement in income only when the amounts are paid out of the plan.

(These remarks apply only to IRAs that are foreign retirement arrangements. For the treatment of a Roth IRA, see Income Tax Technical News, No. 43.)

A 401(k) plan is considered a qualifying retirement plan as defined in Art. XVIII, para. 15 of the Canada-US Convention. General discussion of how the Canadian RRSP rules are applied to a Canadian resident performing services for a US-resident employer, with the other requirements of Art. XVIII, para. 15 being satisfied.

A payment under an unmatured RRSP is not considered to be a "pension" for purposes of paragraph 3 of Article 17 of the U.K. Convention because that amount will no longer fund any future entitlement under the RRSP.

"As long as the amount of the pension arising in the U.S. would have been excluded from taxable income in the U.S. by a U.S. resident recipient, such amount would be exempt from taxation in Canada by a Canadian resident recipient. Consequently, it [is not required] that the Canadian resident recipient be a resident or former resident of the U.S ... before he or she can qualify, under paragraph 1 of Article XVIII of the [U.S.-Canada] Convention ... ."

A taxpayer who receives a periodic pension from the International Monetary Fund should file a letter from the IMF annually with his or her T1 return.

Although an RRSP is a "pension" for purposes of Article XVIII of the Canada-U.S. Convention, funds paid out of an RRSP to the estate of a deceased U.S. annuitant would not qualify as "periodic pension payments" for purposes of paragraph 2 of Article XVIII. Accordingly, the reduced rate of 15% would not apply. The fact that the source of funds in the RRSP was dividends or interest would have no relevance.

A payment out of a RRIF is considered to be a payment under a retirement plan referred to in the definition of pension in Article 17, paragraph 3, of the Canada U.K.-Convention. If the payment from the RRIF qualifies as a periodic pension payment as defined in s. 5 of the Income Tax Conventions Interpretation Act, it would fall under the meaning of pension in Article 17 and would be exempt from Canadian non-resident withholding taxes pursuant to paragraph 1 of Article 17.

A retiring allowance paid to a U.K. resident in respect of his wrongful dismissal by a Canadian company would not be exempt under Article 17, Article 15 or any other Article of the Canada-U.K. Convention, given that it does not qualify as a "pension" nor as "salaries, wages and similar remuneration".

If a payment out of a RRIF qualifies as a "periodic pension payment" as defined under the Income Tax Conventions Interpretation Act, and it is paid to a resident of the U.S., the Canadian non-resident withholding tax on such payment will be 15% of the gross amount of the RRIF payment pursuant to paragraph 2(a) of Article 18 of the U.S. Convention.

Notwithstanding the definition for "annuity" found in s. 5 of the Income Tax Conventions Interpretation Act, a payment out of a RRIF which qualifies as a "periodic pension payment" under the ITCIA which is paid to a resident of the UK, falls under the term "pension" in paragraph 3 of Article XVII of the UK Convention.

In order for RC to grant treaty-exemption for the portion of U.S. pension benefits paid to a Canadian resident that represent a return of premiums, it will require a breakdown from the plan. Before RC will grant treaty-exemption on any other portion of the pension benefit, it will require a letter from the U.S. tax authorities confirming that such other portion will be exempt from Canadian tax in accordance with paragraph 1 of Article XVIII of the U.S. Convention.

A retiring allowance is not periodic pension income and therefore is not eligible for rate reduction under Article XVIII, paragraph 2 of the Canada-U.S. Convention.

If a transfer out of a U.S. pension plan directly into an IRA would not have resulted in the amount being taxed in the U.S. had the person been resident there at the time of the transfer, the exemption of Article XVIII of the Canada-U.S. Convention will apply.

The payment of the "minimum amount" under a RRIF to a U.S.-resident annuitant will be subject to withholding at the rate of 15% as limited by Article XVIII of the Canada-U.S. Convention. However, where the annuitant requests a payment in excess of the minimum amount for the year, the excess payment will not qualify as a periodic pension payment or will be subject to withholding tax of 25% pursuant to s. 212(1)(q) of the Act.

Alimony or maintenance paid by a person who is a U.S. resident at the time of the payment will be considered to arise in the U.S. for purposes of paragraph 6 of Article XVIII of the Canada-U.S. Convention even if the payments were made pursuant to an order of a Canadian court made while the payer was a Canadian resident.