2019-0802301E5 Annuity purchased from foreign pension

Principal Issues: What are the tax consequences to a Canadian resident taxpayer who acquires an annuity contract on the winding up of a foreign pension plan?

Position: The taxpayer is considered to have received a pension benefit equal to the fair market value of the annuity contract at the time it is acquired and is required to include this amount in income under subparagraph 56(1)(a)(i). Depending on the characteristics of the annuity, the annuity will be subject to annual taxation under either section 12.2 or paragraphs 56(1)(d) and 60(a).

Reasons: There is no tax-deferred rollover in the Act for annuities purchased from foreign pension plans. The rollover in section 147.4 applies only to RPPs.

Author: Podor, Karina
Section: 56(1)(a); 56(1)(d); 60(a); 12.2(1)

XXXXXXXXXX                                                                           2019-080230
                                                                                                    K. Podor

September 12, 2019

Dear XXXXXXXXXX:

Re:   Annuity purchased from foreign pension plan

This is in reply to your correspondence of March 26, 2019 in which you requested our views regarding the tax consequences to an individual who will acquire an annuity contract in satisfaction of their benefits under a foreign pension plan.

We understand the facts to be as follows: The individual was previously employed by a U.S. multi-national corporation and participated in a defined benefit pension plan established in Europe by the employer for its expatriate employees. The individual retired and subsequently immigrated to, and became a resident of, Canada. The employer has decided to wind up the pension plan by purchasing annuity contracts for each retired member. Each annuity contract is designed to provide the member with the same or similar benefits as would have been provided had the original plan remained. Further, we have assumed that the individual’s annuity contract will be purchased with funds from the pension plan and that the individual will be the owner of the annuity contract.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (footnote 1)  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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Subsection 147.4(1) applies where an individual acquires ownership of an annuity contract in satisfaction of their entitlement to benefits under a registered pension plan (“RPP”). Where the conditions in subsection 147.4(1) are met, the individual is deemed not to have received an amount from the RPP as a result of acquiring the annuity and any amounts received under the contract are deemed to be amounts received under the RPP. As a result, there is no immediate taxation on the acquisition of the annuity and any payments under the contract are included in the recipient’s income in the year in which they are received. However, there is no comparable provision in the Act for annuities purchased from foreign pension plans.

In the above situation, the individual will be considered to have received a pension benefit equal to the fair market value of the annuity contract at the time the individual acquires it and must include this amount in their income under subparagraph 56(1)(a)(i). We do not have sufficient information to comment on whether relief may be available to the individual under an applicable income tax treaty.

Annuities are generally subject to taxation in Canada under either section 12.2 or paragraphs 56(1)(d) and 60(a) of the Act, depending on the type and structure of the annuity contract. In the absence of all relevant details on the particular annuity contract, we are unable to comment definitively.

We will bring this matter to the attention of the Department of Finance Canada for consideration as to whether, and to what extent, a legislative change is warranted.

We trust these comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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

1  Unless otherwise stated, all statutory references in this document are to the Income Tax Act (the “Act”).

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