2014-0541961E5 RPP and CPP payments-former employee of Consulate

Principal Issues: Are RPP and CPP payments to non-resident former employees of an Embassy or Consulate exempt from Part XIII tax by virtue of the exception under subparagraphs 212(1)(h)(v) and (vi) of the Act?

Position: Yes

Reasons: The payments satisfy the exception in subparagraphs 212(1)(h)(v) and (vi).

Author: Storr, Keely
Section: 115(2)(d), 212(1)(h), and 227(6) of the Act; Article XVIII of the Canada-US Treaty

XXXXXXXXXX                                                                                                                         2014-054196
                                                                                                                                                 Keely Storr
                                                                                                                                                 (613) 957-8284
February 13, 2015

Dear XXXXXXXXXX:

Re:   The Taxation of Pension Payments to a Resident of the US

This is in response to your letter of July 30, 2014 wherein you inquired about the Canadian taxation of registered pension plan (“RPP”) payments and Canada Pension Plan (“CPP”) payments made by the Government of Canada to a resident of the United States (“US”).

The following hypothetical circumstances will be used to address your request:

*     The taxpayer is a Canadian citizen who is a resident of the US for the purposes of the Canada-US Tax Convention (the “Treaty”).
*     The taxpayer worked for the Canadian Consulate and then the Canadian Embassy (both to be referred to as “Consulate” for the purposes of this letter) located in the US.
*     All of the taxpayer’s duties of employment for the Consulate were performed in the US while the taxpayer was a non-resident of Canada for the purposes of the Income Tax Act (“the Act”).
*     The taxpayer made contributions to the CPP and a RPP solely related to employment at the Consulate.
*     The taxpayer will be receiving payments from the CPP and the RPP after retirement from employment with the Consulate.

The taxpayer will be resident of the US for the purposes of the Treaty when the payments from the RPP and the CPP are received.

In respect of the above hypothetical circumstances, you are enquiring whether RPP and CPP payments to the taxpayer are exempt from Part XIII tax by virtue of the exception provided in subparagraphs 212(1)(h)(v) and (vi) of the Act.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Unless otherwise stated, references in this letter to a Part, section, subsection, paragraph or subparagraph refer to the provisions of the Act.

Our Comments

A payment by a Canadian resident of a superannuation or pension benefit to a non-resident is generally subject to Canadian tax under Part XIII at the rate of 25% pursuant to paragraph 212(1)(h), unless one of the exceptions in that paragraph apply.

One of the exceptions is found in subparagraphs 212(1)(h)(v) and (vi). This exception is applicable if the superannuation or pension payment may reasonably be regarded as attributable to services rendered by the person in taxation years during which the person was not at any time resident in Canada, and throughout which the person was not employed, or was only occasionally employed, in Canada.

With respect to the condition in subparagraph 212(1)(h)(vi), it is our view that employment services performed at the Consulate do not constitute employment in Canada. Furthermore, although paragraph 115(2)(d) deems a non-resident person, such as this hypothetical taxpayer, to be employed in Canada, such deeming provision only applies for the purposes of subsection 2(3) and does not apply for the purposes of subparagraph 212(1)(h)(vi).

Given the above hypothetical situation, the RPP payments satisfy both of the conditions set out in subparagraphs 212(1)(h)(v) and (vi) and are therefore exempt from Canadian tax under Part XIII.

The CPP is considered by the Canadian courts to be a pension plan, and we are of the view that CPP benefits are attributable to services rendered by a person. Therefore, a CPP payment, in this situation, would also meet the exception in subparagraphs 212(1)(h)(v) and (vi) and would be exempt from Canadian tax under Part XIII. It is noteworthy that in this case, even if a portion of the CPP benefits did not qualify for exemption from Part XIII tax under subparagraphs 212(1)(h)(v) and (vi) (e.g. if the taxpayer had been employed in Canada prior to joining the Consulate), that portion would be exempted from Part XIII tax under paragraph 5 of Article XVIII of the Treaty.

It is important to note, that the exception in subparagraphs 212(1)(h)(v) and (vi) only applies to RPP and CPP payments received that are attributable to the services performed by the taxpayer and not any other person.

Pursuant to subsection 227(6), when an amount has been paid under Part XIII to the Receiver General, on behalf of a taxpayer who was not liable to pay or where the amount so paid is in excess of the amount that the taxpayer was liable to pay under this Part, the Minister shall, on written application, refund all or part of the Part XIII taxes. Taxpayers may apply for a refund of Part XIII withholding taxes by completing form NR7-R, which is available on the CRA website, and mail it to the Non-Resident Withholding Division of the International and Ottawa Tax Services Office at P.O. Box 9769, Station T, Ottawa, Ontario Canada K1G 3Y4. The application for refund must be made no later than 2 years after the end of the calendar year in which the amount was withheld. If a taxpayer applies for and receives a refund of any Part XIII taxes in respect of which a foreign tax credit has been claimed for US tax purposes, the taxpayer should consider the US tax implications of the Part XIII tax refund.

We trust these comments are of assistance.

Olli Laurikainen, CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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