Principal Issues: Whether a pension paid to a Canadian resident individual in respect of services rendered as a public servant employee of the State of China is exempt from Canadian taxation pursuant to Article 18 of the Convention?
Position: The Pension is subject to tax in Canada by virtue of Article 20 of the Treaty.
Reasons: Article 18 of the Treaty expressly excludes pensions from its application.
XXXXXXXXXX 2019-081965 Angelina Argento
February 10, 2022
Dear Madam,
Re: Pension income from China
Facts
This is further to your letter of August 10, 2019 requesting our comments regarding the taxability of pension income (the "Pension") paid by the Government of China to an individual resident in Canada (the "Taxpayer"). The Pension is payable for services rendered by the Taxpayer as a civil servant.
You informed us that the Pension is not derived from a personal contribution made before retirement or from commercial insurance, and is therefore non-taxable under Chinese taxation law.
Question
You asked whether, under Article 20 of the Agreement Between the Government of Canada and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Convention"), Canada retains its right to tax the Pension, or whether, due to the terms of Article 18 of the Convention, the Pension is not taxable in Canada.
Summary
Article 20 of the Convention applies and maintains Canada's right to tax the Pension since the recipient resides in that State. Article 18 of the Convention expressly excludes pensions paid by a Contracting State and, therefore, does not apply to the Pension so as to exempt it from any Canadian tax.
Our Comments
This technical interpretation provides general comments on provisions contained in the Income Tax Act (the "Act") and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving any particular taxpayer, but rather to assist you in making that determination. Our Directorate will only confirm the tax treatment of a particular taxpayer's transactions in the context of an advance income tax ruling request as described in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.
Unless otherwise indicated, all legislative references are to the Act.
56(1)a)
Subparagraph 56(1)(a)(i) reads as follows:
“56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
Pension benefits, unemployment insurance benefits, etc.
(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,
(i) a superannuation or pension benefit including, without limiting the generality of the foregoing, …”
Under the definition of "superannuation or pension benefit" in subsection 248(1), "superannuation or pension benefit" includes " any amount received out of or under a superannuation or pension fund or plan".
However, section 248 does not define the terms "superannuation fund" and "superannuation plan" or the term "pension", but does specify that it includes "any payment made to a beneficiary under the fund or plan".
In Rasmussen v. The Queen (decision rendered in informal procedure), 2019 TCC 124, Judge Favreau summarizes the jurisprudence as follows:
“[19] Payments out of or under a “foreign retirement arrangement” established under the laws of a country are not included under subparagraph 56(1)(a)(i) of the Act if the amount would not be subject to income taxation in the foreign country if the taxpayer were resident in that country. The expression “foreign retirement arrangement” is defined in section 248 of the Act for this purpose to mean a plan or arrangement prescribed by regulation. The only “foreign retirement arrangement” so prescribed under Regulation 6803 is a United States Individual Retirement Account (“IRA”).
[...]
[22] In Abrahamson v M.N.R., 91 D.T.C. 213, this Court held that:
… the words ‘superannuation or pension benefit’ in subparagraph 56(1)(a)(i) of the Act contemplate a payment of a fixed or determinable allowance paid at regular intervals to a person usually, but not always, as a result of the termination of employment for the purpose of providing that person with a minimum means of existence; the formal program for the payment of the specified benefits, or the way the benefits are to be carried out, must be organized or promoted by a person other than the beneficiary since the beneficiary’s right to receive the superannuation or pension benefits is determined by the superannuation or pension plan contemplated by subparagraph 56(1)(a)(i). In other words, the regularity and amount of the payments are made in accordance to the term of a plan and not at the discretion or direction of the beneficiary.
[23] In Woods v. The Queen, 2010 TCC 106, Justice Boyle stated at paragraph 30: (a) that a “superannuation or pension fund or plan is an arrangement which provides for payment of regular post-retirement income to employees and determines the entitlement, the amounts and frequency of such payments;” (b) that “a superannuation or pension fund or plan may also provide for other entitlements and payments to or for the benefit of the employees that relate to retiring from work;” and (c) that “any amount received from a superannuation or pension fund or plan is a superannuation or pension benefit except where the Act specifically provides otherwise.”
[24] In R v. Herman, 1978 CarswellNat 210, the Federal Court wrote at paragraph 13:
In taxing superannuation or pension income the Act appears to make no distinction as to the origin of it. It merely taxes all of it when received by a taxpayer resident in Canada and liable to Canadian income tax. In this case, it differs from the taxation of annuities in which only the interest element is taxable as income and part of each annuity payment received would represent a return of the annuitant’s capital and be treated as such.”
Consequently, we are of the view that the Pension represents a "superannuation or pension benefit" within the meaning of the definition of that term in subsection 248(1) and must therefore be included in computing the Taxpayer's income pursuant to subparagraph 56(1)(a)(i).
Tax Convention
Articles 18 and 20 of the Convention provide as follows:
"Article 18
Government Service
1. a) Remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that Contracting State or subdivision or authority shall be taxable only in that Contracting State.
b ) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that Contracting State and the individual is a resident of that Contracting State who:
(i) is a national of that Contracting State; or
(ii) did not become a resident of that Contracting State solely for the purpose of rendering the services.
[…]
Article 20
Other Income
1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that Contracting State.
2. ...
3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Agreement, and arising in the other Contracting State may be taxed in that other Contracting State." (Emphasis added).
Article 18 of the Convention expressly excludes pensions paid by one of the Contracting States, and therefore does not apply to the Pension.
Thus, paragraph 1 of Article 20 of the Convention allows Canada to retain its right to tax the Pension since the Taxpayer resides there. Furthermore, although paragraph 3 of Article 20 of the Convention provides that China may retain its right to tax the Pension, the Taxpayer has indicated that no tax is levied by China. Consequently, it appears that the Taxpayer will have no foreign taxes in respect of which it can claim a foreign tax credit.
We hope you find our comments of assistance.
Best regards,
Angelina Argento
Section Manager
for the Division Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch