2014-0529791E5 Pension income arising in Hong Kong

Principal Issues: Whether pension benefits arising in Hong Kong Special Administrative Region and received by a resident of Canada are exempt from tax in Canada in whole or in part because of the Canada Hong Kong tax agreement

Position: No.

Author: Pietrow, Victor
Section: 81(1)(e), 81(1)(d); Canada-Hong Kong tax agreement

XXXXXXXXXX                                                                                                                         2014-052979
                                                                                                                                                 Victor Pietrow
July 10, 2014

Dear XXXXXXXXXX:

Re: Pension income from Hong Kong

Further to our letter to you dated XXXXXXXXXX (photocopy attached), we are writing in response to your letter dated XXXXXXXXXX, to which you attached a copy of your letter dated XXXXXXXXXX.  We confirm that we did not receive your letter dated XXXXXXXXXX.

In your letter dated XXXXXXXXXX, you indicate that you earn income from XXXXXXXXXX, and XXXXXXXXXX.  You are enquiring as to whether the Canada-Hong Kong Income Tax Agreement affects the taxation in Canada of that pension income.

The particular situation outlined in your correspondence appears to relate to a factual one, involving one or more specific taxpayers. It is not this Directorate’s practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling.  For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002.  This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the internet at http://www.cra-arc.gc.ca.  We are, however, prepared to provide the following general comments which may be of assistance.

Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the “Act”).

Where a resident of Canada receives an amount on account or in lieu of payment of, or in satisfaction of, “a superannuation or pension benefit” arising in a particular country, the full amount received, before withholding taxes, is taxable under subparagraph 56(1)(a)(i) of the Act unless a specific provision of the Act or an income tax convention between Canada and the particular country applies to exclude the amount from income.  The Canada-Hong Kong Income Tax Agreement (the “Tax Agreement”) was signed on November 11, 2012 and entered into force on October 29, 2013.  According to Article 17 of the Tax Agreement, pensions arising in Hong Kong SAR and paid to a resident of Canada in consideration of past employment may be taxable in Hong Kong SAR.  Furthermore, according to paragraph 2 of Article 20 of the Tax Agreement, all other pensions derived by a resident of Canada from sources in Hong Kong SAR may be taxable in Hong Kong SAR.  However, nothing in the Tax Agreement eliminates or limits Canada’s right to tax any of the XXXXXXXXXX pensions you are receiving.

The Act and the Tax Agreement provide measures to reduce or eliminate the double taxation of income. In general, you may be entitled to claim a foreign tax credit. Income Tax Folio S5-F2-C1, “Foreign Tax Credit”, provides the CRA’s general views on the computation of the foreign tax credit.  You may wish to refer to this publication, which can be found on the CRA website at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html.

As previously noted in our letter dated XXXXXXXXXX, we also have the following comments in connection with the Hong Kong War Memorial Pension that you are receiving:

1.    Under paragraph 81(1)(e) of the Act, a pension payment received from a particular country by a resident of Canada will be exempt from taxation in Canada if the payment meets the following criteria:

*     the payment is a pension payment;
*     it is received on account of disability or death;
*     the disability or death must have arisen out of a war;
*     the particular country must have been an ally of Canada at the time of the war; and
*   the particular country must grant substantially similar relief to payments referred to in paragraph 81(1)(d) of the Act arising in Canada received by a resident of the particular country.

2.    Paragraph 81(1)(d) exempts from taxation a pension payment, an allowance or compensation received under or subject to the Pension Act, the Civilian War-related Benefits Act or the War Veterans Allowance Act, an amount received under the Gallantry Awards Order or compensation received under the regulations made under section 9 of the Aeronautics Act.

3.    Paragraph 13 of IT-397R (Amounts Excluded from Income - Statutory Exemptions and Certain Service or RCMP Pensions, Allowances and Compensation) lists allies of Canada during the Second World War.  In our view, for the purposes of paragraph 81(1)(e), we would consider a pension received from Hong Kong SAR to be a pension received from a country that was an ally of Canada at the time of the Second World War.

4.    Based on the limited information provided to us, we are unable to provide an opinion in respect of the specific situation outlined in your letter.  In particular, it is not clear, based on the information provided, whether the XXXXXXXXXX’s pension you receive from Hong Kong SAR is on account of death or disability arising out of a war, nor is it clear whether Hong Kong SAR grants substantially similar relief to payments referred to in paragraph 81(1)(d) of the Act arising in Canada received by a resident of Hong Kong SAR. 

We trust that the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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