Principal Issues: Tax treatment of a military service pension, a military disability pension, and associated inflation adjustment, from India.
Position: The total amount of these pensions and the associated inflation adjustment received in a tax year is required to be included in income as pension income but is deductible in calculating taxable income in Canada.
Reasons: 56(1)(a), 110(1)(f)(i); Article 18 of the Canada-India Income Tax Agreement.
XXXXXXXXXX 2020-086008 V. Pietrow October 13, 2020
Dear XXXXXXXXXX:
RE: Pension income received from India
We are writing in response to your letter of August 7, 2020 to the Commissioner of the Canada Revenue Agency regarding whether the receipt of a periodic military service pension and a military disability pension from India would be taxable in Canada.
More specifically, as you indicated in our subsequent telephone conversation, you have asked us to confirm whether the following benefit amounts received by a Canadian resident would be taxable in Canada:
- The receipt of a military service pension (and the associated inflation adjustment), administered and paid by the Department of Ex-Servicemen Welfare, Ministry of Defence, Government of India; and
- The receipt of a military disability pension (and the associated inflation adjustment), also administered and paid under the same pension scheme by the Department of Ex-Servicemen Welfare, Ministry of Defence, Government of India.
In the situation you describe, the individual retired as a commissioned officer with at least 20 years of service in the Indian army. Both the military service pension and the military disability pension are in respect of that service, all of which was performed while the individual was a non-resident of Canada.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
A resident of Canada is taxable in Canada on their worldwide income. Generally, periodic or lump-sum benefits received out of or under a foreign pension plan by a resident of Canada are taxable in Canada pursuant to subparagraph 56(1)(a)(i) of the Act, subject to the provisions of any applicable tax treaty. Whether an amount is a benefit received out of or under a pension plan is a question of fact.
In general, we would consider a plan to be a pension 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 the contributions are used to provide an annuity or other periodic payment to the employee on or after the employee's retirement. A plan can be a pension plan for the purposes of the Act regardless of whether it is registered under the Act and regardless of whether it is established inside Canada or outside Canada.
In our view, for purposes of the above-described situation, the total amount of the Indian military service pension and the Indian military disability pension (inclusive of the inflation adjustment amounts) received in the tax year by the Canadian resident individual would be included in the individual’s income under the Act as pension income but would be exempt from taxation in Canada under Article 18 of the Canada-India Tax Agreement.
For more information on how to report the income inclusion and the offsetting deduction, please refer to Line 11500 - Pensions from a foreign country on the Government of Canada website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-11500-other-pensions-superannuation/line-11500-pensions-a-foreign-country.html.
We trust that these comments will be of assistance.
Yours truly,
Kimberly Duval, CPA, CA
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch