At the time of a “benefit crystallization event” (e.g., retiring or turning 75), the UK tax authority (HMRC) imposed a charge (the “lifetime allowance charge”) on 25% of the amount by which the total value of a pension plan member’s pension entitlements exceeded a threshold amount (recently, £1,073,100). HMRC considered that the charge was not a tax on income and, thus, could be imposed on a Canadian resident notwithstanding Art. 18 of the Canada-UK Treaty.
In finding that the charge, even though collected by way of deduction against pension payments made to a Canadian-resident pension plan member, did not qualify for a foreign tax credit, CRA stated:
While the Charge is a charge to tax, it is not computed on income or profits, nor is it similar to the tax imposed under Part XIII of the Act. Rather, the Charge is computed on the basis of the size of a taxpayer’s pension scheme, measured against a specified limit (i.e., the “lifetime allowance”), and is levied when a “benefit crystallization event” results in the payment of benefits which exceed that limit.