Principal Issues: Is U.K. pension excluded from income under 56(1)(a)(i)(C.1)?
Position: No
Reasons: It is not a "foreign retirement arrangement" as defined in Regulation 6803.
XXXXXXXXXX 2005-015647 S. E. Thomson Attention: XXXXXXXXXX:
April 12, 2006
Dear Sir:
Re: U.K. Pension
This is in reply to your letters of October 24, 2005, November 4, 2005, December 1, 2005 and March 31, 2006, and further to our email to you on November 2, 2005. You have told us that you are in receipt of a pension from the U.K. National Insurance, which is not taxable in the U.K. You believe that the pension should not be taxable in Canada because of clause 56(1)(a)(i)(C.1) of the Income Tax Act (the "Act").
Since your question involves an actual taxpayer and a factual situation, the Canada Revenue Agency (the "CRA") is unable to definitively reply to your question unless it has had the opportunity to review all the facts and related documentation. Such a review would be conducted by the relevant tax services office. The address of the tax services office serving Saint John, NB is,
126 Prince William Street
Saint John, NB
E2L 4H9
We nevertheless offer the following general comments regarding the relevant provisions of the Income Tax Act (the "Act") that may apply. Since these comments are general in nature, they may or may not apply in your situation and are not binding on the CRA.
To address your question, we have made a couple of assumptions. First, we assume that you are resident in Canada for tax purposes. Second, we assume that the amount that you have received is from the U.K. government National Insurance Plan. If either of these assumptions is incorrect, you should write to the tax services office with the correct information for them to make a determination. As a resident of Canada, you are taxable in Canada on your worldwide income. Included in your income are amounts received as a "superannuation or pension benefit", pursuant to subparagraph 56(1)(a)(i) of the Act. The CRA generally defines a superannuation or pension plan to be a plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and contributions are used to provide an annuity or other periodical payment on or after the employee's retirement in consideration for his or her employment services, and, in some cases, where amounts have been contributed under the plan by a government. Therefore, it would appear that the U.K. amounts you are receiving under the U.K. National Insurance plan are taxable under subparagraph 56(1)(a)(i) of the Act.
Clause 56(1)(a)(i)(C.1) of the Act was added to the Act to ensure that payments under a "foreign retirement arrangement" were included in income whether or not they were received out of or under a superannuation or pension plan. However, the provision permits these payments to be excluded from income to the extent that they would be excluded from income in the country of source, if the taxpayer were resident there. A foreign retirement arrangement, by virtue of the definition in subsection 248(1) of the Act, means a "prescribed plan or arrangement". A prescribed plan or arrangement is defined in section 6803 of the Income Tax Regulations (the "Regulations"). Currently, section 6803 of the Regulations refers only to certain U.S. plans and arrangements. It does not refer to any plan in the U.K., and therefore, a payment from a U.K. plan such as the National Insurance Plan does not qualify for the exception in clause 56(1)(a)(i)(C.1).
Similarly, the definition of "exempt income" in subsection 248(1) of the Act, and sections 8303 and 8308 of the Regulations do not apply in your situation.
As you have noted, the Canada-U.K. Income Tax Convention (the "Treaty") does not prevent Canada from taxing pension receipts. Paragraph 1 of Article 17 of the Treaty provides that periodic pension payments arising in the U.K. and paid to a resident of Canada shall be taxable only in Canada. Paragraph 3 of Article 17 defines the term "pension" to include any payment under a superannuation, pension or retirement plan, ... as well as any payment made under the social security legislation in the U.K.
To summarize, it is our view that your pension is to be included in your income for tax purposes in Canada, and there is no provision to allow for a deduction or exemption for it.
We trust that we have been of some assistance.
Yours truly,
Olli Laurikainen
For Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch