2019-0829401I7 Pensions from the OECD and NATO

Principal Issues: 1. Are pensions received by Canadian resident taxpayers from the OECD subject to tax in Canada? 2. Are pensions received by Canadian resident taxpayers from NATO subject to tax in Canada?

Position: 1. Pensions from the OECD that arise in France are relieved from tax in Canada. 2. Pensions from NATO that arise in Belgium are not relieved from tax in Canada.

Reasons: 1. Article XVIII(1) of the Canada-France Treaty provides that pensions that arise in France in respect of past employment are only taxable in France. 2. Pension income is included in income pursuant to paragraph 56(1)(a) of the Act. There is no relief from taxation pursuant to Article XVIII(1) of the Canada-Belgium Treaty.

Author: Graham, Kanwal
Section: 56(1)(a); 81(1)(a); 110(1)(f)(i); Article XVIII(1) of the Canada-France Treaty; Article XVIII(1) of the Canada-Belgium Treaty; Foreign Missions and International Organizations Act; Privileges and Immunities (North Atlantic Treaty Organization) Act.

                                                                               July 27, 2021

Exchange of Information Services                          HEADQUARTERS
Specialized Audit Support Division                         Income Tax Rulings Directorate
High Net Worth Compliance Directorate                 K. Graham
Compliance Programs Branch

Attention: Joanne O’Neil
Senior Compliance Officer                                       2019-082940

Pensions from the OECD and NATO

Further to your enquiry of October 3, 2019, you have asked for clarification regarding the tax status of certain foreign pensions. In particular, Canadian resident recipients (“Taxpayers”) of pensions in respect of past employment from the Organisation for Economic Cooperation and Development (“OECD”) and the North Atlantic Treaty Organization (“NATO”) are claiming a deduction at line 256 (additional deductions) of their tax returns in respect of the pensions. Although the Canada Revenue Agency (“CRA”) has been allowing the deduction, it has come to your attention that the payments may be taxable in Canada, and you have asked for clarification of the matter.

Subparagraph 56(1)(a)(i) of the Income Tax Act (“Act”) includes in the income of a taxpayer for a taxation year most types of pension benefits received in the year. This includes benefits from a foreign pension plan that are attributable to services rendered by a person while the person was not resident of Canada. We understand that Taxpayers receiving pensions in respect of past employment with NATO receive an additional amount, identified as a tax adjustment (“Adjustment”) on their pension information slips, and that such Adjustment is paid in accordance with the rules of the pension plan. A pension benefit includes any amount received out of or under a pension fund or plan; accordingly, the Adjustment is a pension benefit that is includable in a Taxpayer’s income for a taxation year pursuant to subparagraph 56(1)(a)(i) of the Act.

However, pursuant to paragraph 81(1)(a) of the Act, an amount is not to be included in computing the income of a taxpayer for a taxation year where that amount is declared to be exempt from income tax by any other enactment of Parliament, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada.

As outlined in our interpretation bulletin IT-397R - Archived, Amounts Excluded From Income – Statutory Exemptions, certain exemptions in respect of remuneration exist under the Privileges and Immunities (North Atlantic Treaty Organization) Act, as well as the Foreign Missions and International Organizations Act. These exemptions do not extend to pension income.

A tax treaty that Canada has with another country may provide relief from tax in respect of certain types of income. The relevant tax treaty will depend upon where the particular pension at issue arises.

Where a pension in respect of past employment is paid to a resident of Canada and the pension arises in France, Article XVIII(1) of the Convention Between Canada and France for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, As Amended by The Protocol Signed January 16, 1987 (“Canada-France Treaty”) provides that the pension shall only be taxable in France. If the pensions received by the Taxpayers from the OECD arise in France, where the OECD headquarters is located, such pensions may be relieved from tax in Canada pursuant to Article XVIII(1) of the Canada-France Treaty.

With respect to pensions received by the Taxpayers from NATO, some of the pensions may be considered to arise in Belgium, where the headquarters of NATO is located. Unlike the Canada-France Treaty, the Convention Between The Government Of Canada And The Government Of The Kingdom Of Belgium For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital (“Canada-Belgium Treaty”) does not restrict the taxation of a pension to the state in which it arises. Consequently, a pension arising in Belgium paid to a Canadian resident recipient is taxable in Canada.

Where a particular Taxpayer receives a pension benefit and the amount thereof is relieved from tax in Canada due to a provision in a tax treaty between Canada and the country in which the pension arises, subparagraph 110(1)(f)(i) of the Act provides that the Taxpayer may deduct the amount, to the extent that it is included in computing the Taxpayer’s income for the tax year, in the computation of the Taxpayer’s taxable income for the year. The deduction is claimed on line 25600 (previously line 256) of the Taxpayer’s tax return.

We trust our comments are of assistance.

Yours Truly,

Nicolas Bilodeau
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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