Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the tax withheld by the European Union on a pension received by a Canadian resident from XXXXXXXXXX would be considered an income tax paid by the taxpayer to the government of a country other than Canada, such that the foreign tax credit provided by subsection 126(1) or (3) of the Act would be applicable.
Reasons: The foreign tax credit provided by subsection 126(1) must be paid to a government of a country other than Canada. The tax withheld on the pension from XXXXXXXXXX is paid to the European Union. The European Union is an international organization as defined in section 2 of the Foreign Missions and International Organization Act, and in our view would not be considered a government of a country other than Canada. Therefore, the tax withheld by the European Union on the pension income is not considered an income tax paid to a government of a country, and the foreign tax credit provided by subsection 126(1) is not available. While subsection 126(3) provides a foreign tax credit for levies paid in lieu of taxes to international organizations such as the EU, it only applies to employment income.
Author: Godson, Gillian
Section: 56(1)(a), 110(1)(f)(i), 110(1)(f)(iii), 126(1), 126(3)
October 30, 2014
Re: Pension from XXXXXXXXXX
We are writing in reply to your fax dated August 6, 2013, concerning the pension income received from sources outside of Canada by a Canadian resident. We apologise for the delay in our response.
As noted in your enquiry, the taxpayer is a former employee of XXXXXXXXXX and receives a monthly pension amount from XXXXXXXXXX. You have asked whether the amount of withholding by the European Union with respect to a pension paid by XXXXXXXXXX to a Canadian resident would be considered an income tax paid by the taxpayer to the government of a country other than Canada, such that the foreign tax credit provided by subsection 126(1) of the Income Tax Act (the “Act”) would be applicable.
XXXXXXXXXX. As such, The Protocol of Privileges and Immunities of the European Communities applies to the employees of XXXXXXXXXX. Accordingly, XXXXXXXXXX employees and former employees are liable to pay an income tax to the European Union on their XXXXXXXXXX salaries and pensions. This tax is withheld at source by XXXXXXXXXX. The employees and former employees are exempt from paying national taxes on their XXXXXXXXXX salaries, wages, and emoluments in accordance with Article 12 of Protocol 7 of the Treaty on European Union (Protocol 7 on the Privileges and Immunities of the European Union).
This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted as set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations. In addition, we do not comment on a taxpayer’s tax obligations to another country.
As a resident of Canada, a taxpayer is liable to tax under the Act on their worldwide income. In general, all pension benefits received, including foreign pension benefits, are required to be included in income in accordance with paragraph 56(1)(a) of the Act. In that regard, a resident of Canada who receives a foreign pension from XXXXXXXXXX would be required to include the amount of the foreign pension in their income for Canadian tax purposes.
In some cases, all or a portion of a foreign pension may be exempt from Canadian tax by virtue of a provision contained in a tax treaty that Canada has with another country. Subparagraph 110(1)(f)(i) of the Act provides for a deduction from income in respect of any such non-taxable foreign pension amount. The pension benefit must be included in the individual's income for the year and, if any part of the pension benefit is exempt from tax in Canada because of an income tax treaty, the individual may claim an offsetting deduction for the treaty-exempt part under subparagraph 110(1)(f)(i) of the Act in computing their taxable income.
You have advised us that, the pension benefits from XXXXXXXXXX pertain to employment exercised while the taxpayer was a resident of XXXXXXXXXX. As noted above, the salaries, benefits and pension paid by XXXXXXXXXX are taxed by the European Union for the benefit of the European Union and are exempt from “national taxes” pursuant to the Treaty on European Union. Accordingly, the employment and pension income received from XXXXXXXXXX is not subject to tax in a member state of the European Union, such as XXXXXXXXXX. However, the Treaty on European Union does not have the force of law in Canada. Therefore, the deduction provided by 110(1)(f)(i) would not be applicable. Furthermore, although the pension benefits may have arisen while the taxpayer was a resident of XXXXXXXXXX, it is our view the XXXXXXXXXX does not provide relief from double taxation as both Canada and XXXXXXXXXX retain the right to tax the pension income in the case of a Canadian resident in receipt of a foreign pension arising in XXXXXXXXXX.
In general, where foreign pension amounts received by a Canadian resident may be subject to tax in both the country of origin and in Canada, the taxpayer may be entitled to claim a foreign tax credit to reduce or eliminate the double taxation. Subsection 126(1) of the Act may provide a foreign tax credit against the Canadian tax otherwise payable for any foreign income or profits taxes (including withholding taxes) paid on the foreign-source income. However, the foreign tax credit provided by subsection 126(1) must be in respect of tax paid to a government of a country other than Canada. In the situation at hand, the tax withheld on the pension from XXXXXXXXXX is paid to the European Union. The European Union is an international organization as defined in section 2 of the Foreign Missions and International Organization Act, and, in our view, would not be considered a government of a country other than Canada. Accordingly, the tax withheld by the European Union with respect to the pension income is not considered an income tax paid to a government of a country and the foreign tax credit provided by subsection 126(1) is not available.
To address situations similar to your client’s situation, subsection 126(3) of the Act provides a tax credit to Canadian-resident employees of international governmental organizations other than prescribed international governmental organizations. The amount of the credit provided by subsection 126(3) is limited to the amount of any levy in lieu of taxes charged to the employee by the organization on the employee’s remuneration from employment. The EU is an international organization for the purposes of subsection 126(3); however, in your client’s situation the taxpayer is in receipt of pension income from XXXXXXXXXX, not income from employment. Therefore, the credit provided in subsection 126(3) is not applicable.
We trust these comments will be of assistance.
Terry Young, CPA, CA
Manager, Administrative Law Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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