Principal Issues: [TaxInterpretations translation] (1) Is a pension from Switzerland a foreign retirement arrangement referred to in clause 56(1)(a)(i)(C.1)?
(2) If a Canadian resident receives an annuity from Switzerland, must he or she include this amount in his or her income?
Position: (1) No
(2) Generally yes.
Reasons: (1) Regulation 6803 defines a foreign retirement arrangement as a plan or arrangement to which subsection 408(a), (b) or (h) of the United States’ Internal Revenue Code of 1986, as amended from time to time, applies.
(2) Subparagraph 56(1)(a)(i) refers to a superannuation or pension benefit. If the Canadian resident pays a tax to the Swiss government, then he or she may be able to benefit from the foreign tax credit under subsection 126(1). If it is a benefit taxable in Switzerland only, subparagraph 110(1)(f)(i) would apply.
XXXXXXXXXX 2008-027427 Catherine Ayotte, Notary, M.Fisc. January 14, 2009
Dear Sir,
Re: Taxation of a Foreign Annuity Received by a Canadian Resident
This is further to your email of April 11, 2008, in which you asked our opinion on the taxation of a Canadian resident who receives an old age pension from Switzerland. More specifically, you wish to know whether clause 56(1)(a)(i)(C.1) can apply to an annuity from Switzerland or whether another provision of the Act ensures that the annuity is not taxable.
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act"); all references to the "Regulations" are to the Income Tax Regulations.
It appears to us that the situation described in your letter could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate’s practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should provide all relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments that may be of assistance to you.
Our Comments:
Clause 56(1)(a)(i)(C.1)
Clause 56(1)(a)(i)(C.1) refers to the term "foreign retirement arrangement". This term is defined in subsection 248(1) as a prescribed plan or arrangement. Section 6803 of the Regulations provides that a prescribed plan or arrangement is one to which subsection 408(a), (b) or (h) of the United States’ Internal Revenue Code of 1986, as amended from time to time, applies.
Consequently, a pension from Switzerland cannot qualify as a foreign retirement arrangement.
General comments on the taxation of an annuity from Switzerland
In general, subject to tax treaties with foreign countries, paragraph 3(a) provides that the income of a person resident in Canada is the total of all amounts each of which is the person's income for the year from sources inside or outside Canada.
Subparagraph 56(1)(a)(i) provides, without limitation to the generality of section 3, that a taxpayer must include in income for a taxation year all amounts received by the taxpayer in the year in full or partial payment as a "superannuation or pension benefit", regardless of whether the amounts originate in Canada or outside Canada.
The term "superannuation or pension benefit" is defined in subsection 248(1) and includes any amount received out of or under a superannuation or pension fund or plan, including any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary and, in certain cases, where an amount is contributed to the plan by a government. Whether a particular plan is a superannuation or pension fund or plan for the purposes of the Act is a question of fact.
Paragraph 1 of Article 18 of the Convention between Canada and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital (the Convention) provides that pensions and annuities may be taxed in the State in which the annuity arises and according to the law of that State. In the case of periodic payment of a pension or annuity, the tax thus established may not exceed 15 per cent of the gross amount of the payment. For the purposes of Article 18, the term "pensions" does not include payments under the social security legislation in a Contracting State. The terms pensions and annuities are not otherwise defined in the Convention. In these circumstances, Article 3 of the Convention provides that any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.
Where, under the terms of paragraph 1 of Article 18 of the Convention, the payment of an annuity from Switzerland to a Canadian resident may be taxed in Switzerland, the taxpayer may be entitled to a foreign tax credit. In particular, where a non-business-income tax is paid by a Canadian resident to a government of a foreign country, subsection 126(1) allows the taxpayer to claim a deduction in respect of such tax. The term "non-business-income tax" is defined in paragraph 126(7)(c). For more details regarding the operation of this credit, we invite you to consult Interpretation Bulletin IT-270 R3, Foreign Tax Credit available on the CRA's Internet site at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it270r3/it270r3-e.pdf.
Paragraph 2 of Article 18 of the Convention provides for certain situations where an amount may be exempt from Canadian tax:
“2. Notwithstanding anything in this Convention:
(a) pensions paid by, or out of funds created by, Switzerland or a political subdivision or a local authority thereof to any individual in respect of services rendered to Switzerland or subdivision or local authority thereof in the discharge of functions of a governmental nature shall be taxable only in Switzerland;
(b) war pensions and allowances (including pensions and allowances paid to war veterans or paid as a consequence of war) arising in Canada and paid to a resident of Switzerland shall be excluded from the bases used for the computation of Swiss tax, to the extent they would be exempt from Canadian tax if received by a resident of Canada;
(c) pensions and allowances received from Switzerland under the legislation concerning Military Insurance shall be exempt from Canadian tax so long as they are exempt from Swiss tax;
(d) alimony and other similar payments arising in a Contracting State and paid to a resident of the other Contracting State who is subject to tax therein in respect thereof, shall be taxable only in that other State.”
An amount received as a superannuation or pension benefit described in paragraph 2 above must be included in the taxpayer's income by virtue of subparagraph 56(1)(a)(i). However, such an amount may be deducted in computing the taxpayer's taxable income if the amount is exempt from income tax in Canada because of a provision in a tax treaty between Canada and another country that has the force of law in Canada by virtue of subparagraph 110(1)(f)(i).
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.