2016-0634231I7 Pension received from the European Union

Principal Issues: Is the tax withheld on a pension amount received from the European Union eligible for the foreign tax deduction?

Position: No

Reasons: The European Union is not a government of a country and the pension amount is not employment income from the European Union; therefore, the amounts withheld on the pension amounts are not eligible for a foreign tax deduction under either subsection 126(1) or subsection 126(3) of the Income Tax Act.

Author: Robinson, Lauri
Section: 56(1)(a), 110(1)(f), 126(1), 126(3)

                                                                                                                                                December 8, 2016

Roger Clarke                                                                                                                           HEADQUARTERS
Individual Programs Support Section                                                                                      Income Tax Rulings
Taxpayer Services Directorate                                                                                                Directorate
Assessment, Benefit, and Service Branch                                                                              Lauri Robinson, CPA, CMA

                                                                                                                                                2016-063423

Re:  Pension from European Union

We are responding to your email dated February 25, 2016, and our conversation of September 28, 2016, in which you asked us to provide clarification on CRA’s position regarding the tax implication of a pension amount received from the European Union (“EU”), as well as the corresponding foreign tax withheld.

The facts that you presented were as follows:

A Canadian taxpayer receives pension amounts from XXXXXXXXXX the EU whose headquarters is located in XXXXXXXXXX.  The pension amounts received are the result of the taxpayer’s employment with XXXXXXXXXX in XXXXXXXXXX.  The taxpayer at the time of employment was a resident of the United Kingdom.

The amount of the pension received is net of withholding tax and the taxpayer would like to claim the tax withheld as a foreign tax credit.

You referred to the XXXXXXXXXX, our technical interpretation 2013-0500491E5 and the Foreign Missions and International Organizations Act to determine that the pension is taxable in Canada and the taxpayer would not be entitled to an exemption for that pension under line 256 (footnote 1) of the T1 tax return.

Our Comments

In technical interpretation 2013-0500491E5, the pension amount received by the Canadian taxpayer was a result of their employment with the XXXXXXXXXX, an EU institution.  In that document, we stated that the pension amount was taxable in Canada under paragraph 56(1)(a) of the Income Tax Act (the “Act”) and no deduction was available under subparagraph 110(1)(f)(i).  The letter further stated that the tax withheld on the pension was not eligible for a foreign tax credit under subsection 126(1) as the tax was not paid to “the government of a country other than Canada” but rather to the EU, which is an international organization as defined in section 2 of the Foreign Missions and International Organization Act.  Finally, we stated that subsection 126(3) would also not apply as it is only available in respect of tax on employment income, not pension income.

For greater certainty, we confirm the position as originally stated in document 2013-0500491E5; pension amounts received from the EU are taxable in Canada pursuant to paragraph 56(1)(a) and there is no deduction available under subparagraph 110(1)(f)(i) as there is no tax convention or agreement with the EU.  Further, where tax is withheld on a pension amount and remitted to the EU, it is not eligible for a foreign tax credit under either subsection 126(1) or subsection 126(3).

Based on the information supplied, the amounts withheld were paid to the EU and not to a government of a country other than Canada.  Therefore, as stated above, the taxpayer would not be entitled to a foreign tax credit under subsection 126(1). Further, the taxpayer would not be entitled to foreign tax credit under subsection 126(3) because the income is pension income, not employment income.

We hope these comments will be of assistance and if you would like to discuss this matter further, please do not hesitate to contact Lauri Robinson or me.

Yours truly,

Terry Young, CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 A deduction from taxable income on the pension amount pursuant to subparagraph 110(1)(f)(i) of the Act.

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