2014-0553351E5 RPP payments-former employee of Embassy

Principal Issues: 1. Are RPP payments to former employees of an Embassy exempt from tax by virtue of the exceptions under paragraph 212(1)(h) of the Act? 2. What are the procedures for a refund, if applicable, of the Part XIII withholdings?

Position: 1. Yes 2. Taxpayers may apply for a refund of withholding taxes by completing form NR7-R

Reasons: In the hypothetical situation, the taxpayer was a non-resident of Canada throughout the period the taxpayer was employed at an Embassy in the United States in respect of the RPP benefits. Since the taxpayer satisfied both of the conditions in subparagraphs 212(1)(h)(v) and (vi), the RPP payments are exempt from tax under paragraph 212(1)(h) of the Act.

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

XXXXXXXXXX                                                                                                                   2014-055335
                                                                                                                                           Keely Storr
                                                                                                                                           (613) 957-8284
February 12, 2015

Dear XXXXXXXXXX:

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

This is in response to your letter of October 15, 2014 wherein you inquired about the Canadian taxation of registered pension plan (“RPP”) 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/US dual citizen who is a resident of the US for the purposes of the Canada-US Tax Convention (the “Treaty”).
*     The taxpayer has not filed a Canadian tax return since the taxpayer became a non-resident of Canada and accepted employment with a Canadian Embassy (“Embassy”) located in the US.
*     All of the taxpayer’s duties of employment for the Embassy were performed in the US while the taxpayer was a non-resident of Canada for the purposes of the Act.
*     The taxpayer made contributions to a RPP solely related to employment at the Embassy.
*     The taxpayer will be receiving payments from the RPP after retirement from employment with the Embassy.

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

In respect of the above hypothetical circumstances, you are inquiring whether RPP payments to the taxpayer are exempt from Part XIII tax by virtue of the exceptions provided in paragraph 212(1)(h) of the Income Tax Act (“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 refers 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 Embassy 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, with regard to the RPP payments, the taxpayer has satisfied both of the conditions set out in subparagraphs 212(1)(h)(v) and (vi) and therefore, the RPP payments are exempt from Canadian tax under Part XIII. It is important to note, that this exception only applies to RPP payments received that are attributable to the services performed by the hypothetical 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.

Other Comments

The taxpayer described in the hypothetical example above would appear to be a person described in paragraph 115(2)(c) during each taxation year in which the taxpayer was employed at the Embassy. As a result the income from that employment would have been taxable in Canada under the provisions of paragraph 115(2)(e) and subparagraph 115(1)(a)(v). Therefore, a return of income should have been filed by the taxpayer pursuant to subsection 150(1) in respect of each taxation year in which the taxpayer was employed with the Embassy. It is also noteworthy that the income from employment with the Embassy would have been exempt from US federal income tax under Article XIX of the Treaty.

CRA’s voluntary disclosure program (“VDP”) is available for taxpayers to make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported. In order for a taxpayer to make the disclosure under the VDP, they must complete Form RC199 and mail it, along with the information that is requested to be disclosed, to The Voluntary Disclosures Program of the Shawinigan-South TC at P.O. Box 3000, Station Bureau-chef, Shawinigan, QC G9N 7S6. The submission may also be faxed to 1-888-452-8994. Further information regarding completing Form RC199 can be found in IC00-1R4 entitled “Voluntary Disclosures Program”. These documents can be found on the CRA website.

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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