K.B. Harding (613) 957-2129
This is in reply to your letters of August 27 and September 3, 1987 concerning questions dealing with pensions and annuities.
Generally speaking, it is our view that the term "pension" for purposes of a tax convention or agreement would only include those pensions paid out of a registered pension fund or plan. In the case of amounts paid out of a RRSP, RRIF or an annuity acquired under subparagraph 60(1)(ii) of the Income Tax Act we are of the view that periodic amounts are considered as payments out of an annuity. However, a lump sum payment arising on the surrender, cancellation, redemption or sale or other alienation of an annuity would be treated in the same manner as any other lump sum payment received from an annuity. In the case of a DPSP, we have taken the position that any payment received out of the plan will fall within the definition of annuity provided the plan is designed primarily to provide retirement benefits otherwise it would fall within the "Other Income" article of the treaty if one exists.
An exception to this general rule would apply to both the Canada-U.S. Income Tax Convention and the Canada - U.K. Tax Convention where the pension article refers to the word "retirement plan" in the definition of "pension". Under these two treaties, we are of the opinion that payments out of a RRSP, RRIF or annuities acquired under subparagraph 60(1)(ii) of the Act would also be considered to be pensions. In addition, we have taken the position that any payment received out of a DPSP will fall within the definition of "pension" provided the plan is designed primarily to provide retirement benefits.
It should be noted that Revenue Canada has taken the position that the term "periodic" pension benefits under a tax treaty generally means a series of payments made for the purpose of providing the recipient with retirement income throughout his life or for a greater part of his life. The latter portion would ensure that payments out of RRSP. and RRIFs for a term ending at age 90 would qualify as a periodic pension benefit for purposes of a tax agreement or convention.
Most other annuities contracts which are purchased by the annuitant from a life insurer would probably not be considered to be a pension but should fall within the definition of annuity for purposes of a tax agreement or convention.
We have reviewed the columns titled interest, RPP, IAAC and Non-Reg Annuity Periodic of the Non-Resident Tax table and the attached footnotes. Since the columns RRSP, RRIF and DPSP will fall within the general position set out above we have not confirmed the value in your tables but leave this to your review. Our comments on the table and footnotes are as follows:
Footnotes A(b) and D(b)
The exemptions referred to in paragraph (b) of Items A and D of your footnotes merely include in the tax treaty the election provided for in section 217 of the Act. Since this election is available to all non-residents with respect to RPP, RRSP, RRIF and DPSP we see no necessity to refer to this item in your Tax Tables. It is our view that a general statement should reflect this treatment. Where the tax treaty extends the section 217 election to annuities you may wish to indicate this on your Tax Tables by way of a footnote.
Austria
We are of the view that a footnote should be inserted after 15 under the interest item since this rate only applies provided the payment is taxable in the other treaty country. See our note (a) on page 7 of 76-12R3, a copy of which is attached for your use. This footnote would apply to many countries included in your Tax Tables.
Cyprus
It is our view the sum of the periodic pension payments paid to a resident of Cyprus are taxed at the following rates:
(a) if less than $10,000 NIL
(b) excess over $10,000
(between $10,000 and $25,000) 25% of amount in excess of
$10,000(c) excess over $25,000 15% of entire amount
Lump Sum payments
Less than $10,000 NIL Excess over $10,000 25%
Dominican Republic
The reference to footnote (e) to periodic payments made under RPP should be deleted.
Italy
We would suggest you include a footnote similar to the one at item (f) on page 7 of Information Circular 76-12R3.
Netherlands
It should be noted that the new tax convention between Canada and the Netherlands entered into force in August, 1987 and will have effect in Canada in respect of tax withheld at source on amounts paid or credited to non-residents on or after the first day of January 1987.
The new rates are 15 per cent for periodic payment under a RPP and 25 per cent for lump sum payments under such a plan. The withholding rate for periodic annuity payments is 15 per cent whereas lump sum payments are subject to 25 per cent withholding.
New Zealand
We disagree with the view expressed in your footnote. The Convention states that where the sum of the pension payments are less than $10,000 they are exempt from tax but if they exceed $10,000 Canada has the right to tax the whole payment and not only the excess referred to in your footnote. See footnote (m) on page 8 of Information Circular 76-12R3. It should be noted that this also disagrees with your comments with respect to IAACs.
Romania
It should be noted that in the case of periodic pension payments the reduced rate of 15 per cent is only applicable if the payment is taxable in Romania, otherwise it is subject to 25 per cent withholding tax.
Switzerland
See note in paragraph 4 of Information Circular 76-12R3 re payments made to agents or nominees.
We trust these comments will be useful for your purposes.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch