Principal Issues: Request for comments concerning the taxation of UK pension amounts received by a Canadian resident and the ability to transfer a UK pension to Canada on a tax-deferred basis.
Position: General comments provided
Reasons: Question of fact
2005-015798 XXXXXXXXXX Kimberly Duval (613) 599-6054 April 6, 2006
Dear XXXXXXXXXX:
Re: Transfer of United Kingdom Pension to Canada
This is in reply to your letter of November 2, 2005, wherein you requested information regarding the taxation of payments received by a Canadian resident out of a pension plan in the United Kingdom (U.K.) as well as the possibility of transferring the entire foreign pension plan to Canada on a tax-deferred basis.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002, issued by the Canada Revenue Agency (the "CRA"). Copies of information circulars and interpretation bulletins are available on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.
First, you have asked us to confirm that a taxation agreement exists between Canada and the U.K. such that if pension amounts were taxed in the U.K., no further tax would be levied in respect of these benefits in Canada.
In general terms, where a resident of Canada receives an amount out of a U.K. pension plan that qualifies as a pension plan for purposes of the Canadian Income Tax Act (the "Act"), the full amount received, before withholding taxes, is taxable under subparagraph 56(1)(a)(i) of the Act unless a specific provision of the Act or the Canada-U.K. Income Tax Convention (the " Convention") applies to exclude the amount. Although we will not advise you on the taxation of pension amounts received in the U.K., we note that while pension payments sourced in the U.K. may be subject to taxation in accordance with relevant U.K. legislation, the provisions of the Convention might be considered where the amount is paid to a Canadian resident.
Under paragraph 1 of Article XVII of the Convention, a pension arising in the U.K. that is paid to a resident of Canada will only be taxable in Canada and there should be no withholding tax in the U.K. on the pension payments. However, a lump-sum payment to an individual in satisfaction of all his or her entitlements under the U.K. pension plan is specifically excluded from the definition of "pension" amount under this paragraph of the Convention. As such, lump sum payments in settlement of all future entitlements under a pension plan may be subject to withholding tax in the U.K.
Secondly, you have asked us to comment on whether a foreign pension plan could be transferred to Canada on a tax-deferred basis.
An individual may be able to transfer a non-registered pension plan, such as a foreign pension plan, to a Canadian plan in certain circumstances. The CRA's general views regarding the transfer of amounts from non-registered pension plans to Canadian registered plans are found in Interpretation Bulletin IT-528 "Transfers of Funds Between Registered Plans". Specifically, paragraph 26 of the bulletin discusses the application of the roll-over provisions under the Act and indicates when a deduction is available for the transfer of a superannuation or pension benefit from a non-registered pension plan to a Canadian registered pension plan (RPP) or a registered retirement savings plan (RRSP).
To determine whether or not there is any economic and/or tax advantages to the individual to transfer his or her U.K. pension entitlements to a Canadian registered pension arrangement is a matter the individual should discuss with his or her local tax advisors.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch