2021-0917031E5 UK pensions and lifetime allowance charge

Principal Issues: 1. Whether an individual resident in Canada in receipt of a UK pension who becomes subject to the "lifetime allowance charge" in the UK can claim a foreign tax credit in respect of the charge. 2. If no foreign tax credit can be claimed, whether the individual can reduce the amount of UK pension income by the amount of the lifetime allowance charge for Canadian tax purposes.

Position: 1. No. 2. No.

Reasons: 1. The UK's lifetime allowance charge is not an income or profits tax. 2. Any amount received, including constructively received, as a superannuation or pension benefit must be included in computing income for Canadian tax purposes pursuant to subparagraph 56(1)(a)(i).

Author: Graham, Kanwal
Section: 56(1)(a)(i); 126(1); 126(7); 248(1) "superannuation or pension benefit"; Articles 17(1), 17(3) and 21(1)(a) of the Canada-UK Treaty.

XXXXXXXXXX                                                                  2021-091703
                                                                                          K. Graham

January 18, 2024

Dear XXXXXXXXXX:

Re: United Kingdom pensions and the lifetime allowance charge

We are writing in reply to your email of November 5, 2021, in which you asked whether tax relief is available in Canada for a tax charge, known as the lifetime allowance charge, imposed by the government of the United Kingdom (“UK”).

In your request, you described the lifetime allowance charge and its application, as follows:

In addition to the normal UK taxation on periodic pension payments which is modified by Article 17 of the Canada-UK Tax Convention so that the periodic pension payment is taxable only in the country of residence (in this case Canada), the UK tax system also imposes a tax charge known as the “lifetime allowance charge”. This charge is imposed at the time of a “benefit crystallization event” if the size of the pension scheme attributed to the pensioner exceeds a certain amount, currently £1,073,100. There are various ways of determining the size of the pension pot. For various money purchase plans, the determination is relatively simple as the size of the pension “pot” is well known. For defined benefit plans the pension scheme size is usually defined to mean the annual pension benefit X 20. So someone who is entitled to receive a pension payment of, say, £60,000 is regarded as having a pension scheme rights of £1,200,000. As this is in excess of the current lifetime allowance, a lifetime allowance charge amount needs to be calculated on an annual basis with a charging rate of usually 25%.

HM Revenue & Customs in their Pensions Taxation Manual makes the following statement:

“The lifetime allowance charge will not be within the scope of, and will not be exempted or overridden by, any of the UK’s double taxation agreements. That is because it is not a charge on income and so does not come within any of the articles in the treaties”. (PTM 11340).”

In a circumstance where an individual resident in Canada becomes subject to the lifetime allowance charge (“Charge”), you asked whether the Charge will qualify for a foreign tax credit, and if not, whether the individual can reduce the gross pension income by the amount of the Charge in computing his pension income for the year.

Please note that for the purpose of our comments below, we have assumed that a UK pension scheme that becomes subject to the Charge is considered a pension plan for purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (“Act”). The determination of whether a particular UK pension scheme is a pension plan for purposes of the Act is a question of fact.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (“Act”). This technical interpretation does not comment on the application of any provision of a foreign law, including the laws of the UK. 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 IC70-6R12, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Please note that all legislative references in this letter refer to the Act or the Income Tax Regulations, unless otherwise specified.

Lifetime allowance charge

The Charge is imposed under the UK’s Finance Act 2004, and is described in detail in the HM Revenue & Customs Pensions Tax Manual (“Manual”) available on the UK government’s website. Some of the details of the Charge described in the Manual are as follows:

* An individual has a single lifetime allowance in relation to the value of tax-privileged benefits they can draw from a registered pension scheme and will be subject to the Charge when the value of authorized benefits paid out exceed the lifetime allowance.

* The amount subject to the Charge (“chargeable amount”) is always the gross value of the benefits that exceeds the individual’s available lifetime allowance (before any tax is deducted).

* The liability for paying the Charge during the pension scheme member’s lifetime is a joint and several liability of the pension scheme administrator and the member.

* The purpose of the lifetime allowance charge is to broadly recover the tax reliefs those funds have benefited from over the years, both on the initial payments and the build-up of those funds or underlying investments over the years.

* The Charge is a charge to income tax, but the amount on which it is charged is not income under the taxation provisions generally. The Charge is separate from any income tax due on any pension payments actually made.

* The Charge will not count as pension income, or any other kind of income, for the purposes of the UK’s bilateral double taxation conventions.

Foreign Tax Credit

In general, subsection 126(1) permits a Canadian resident taxpayer to deduct, from the Canadian tax otherwise payable for a taxation year, a foreign tax credit in respect of foreign non-business income tax paid by the taxpayer. In order for a tax paid to the government of a foreign country to be considered a “non-business income tax” as defined in subsection 126(7), it must be an income or profits tax. In determining whether a particular foreign tax qualifies as an income or profits tax, the basic scheme of application of the foreign tax is compared with the scheme of application of the income and profits taxes imposed under the Act. Generally, if the basis of taxation is substantially similar, the foreign tax is accepted as an income or profits tax. To be substantially similar, the foreign tax must be levied on net income or profits (but not necessarily as would be computed for Canadian tax purposes) unless it is a tax similar to that imposed under Part XIII of the Act.

While the Charge is a charge to tax, it is not computed on income or profits, nor is it similar to the tax imposed under Part XIII of the Act. Rather, the Charge is computed on the basis of the size of a taxpayer’s pension scheme, measured against a specified limit (i.e., the “lifetime allowance”), and is levied when a “benefit crystallization event” results in the payment of benefits which exceed that limit.

If a particular tax imposed by a foreign country is specifically identified, in an elimination of double taxation article of an income tax treaty between Canada and that country, as a tax for which Canada must grant a deduction from Canadian taxes on profits, income or gains which arose in that other country and which gave rise to the foreign tax in question, the foreign tax will qualify as an income or profits tax when applying the foreign tax credit provision of section 126 in conjunction with that treaty article. Article 21 of the Canada-UK Tax Treaty is the article pertaining to the elimination of double taxation, and Article 21(1)(a) of that treaty states the following:

“1. In the case of Canada, double taxation shall be avoided as follows:

(a) subject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions - which shall not affect the general principle hereof - and unless a greater deduction or relief is provided under the laws of Canada, tax payable in the United Kingdom on profits, income or gains arising in the United Kingdom shall be deducted from any Canadian tax payable in respect of such profits, income or gains.”

As noted in your request, the Charge will not be within the scope of, and will not be exempted or overridden by any of the UK’s tax treaties because it is not a charge on income and does not come within any of the articles in those treaties. As a result, the Charge will not qualify for a foreign tax credit under the Act.

Pension income

In a circumstance where an individual resident in Canada becomes subject to the Charge and is not eligible for a foreign tax credit, you asked whether the individual could reduce the gross amount of the UK pension income by the amount of the Charge in computing the individual’s income for Canadian tax purposes.

Pursuant to subparagraph 56(1)(a)(i), any amount received by a taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a superannuation or pension benefit is to be included in computing the taxpayer’s income for the taxation year. The term “superannuation or pension benefit” is defined in subsection 248(1) and generally includes any amount received out of or under a superannuation or pension fund or plan, including amounts that have been constructively received.

We understand from the Manual that the amount subject to the Charge “is always the gross value of the benefits that exceeds the individual’s available lifetime allowance (before any tax is deducted).” Although the Charge may be deducted by a pension scheme administrator from a pension payment, the recipient of the pension payment will normally be considered to have received the gross amount of the payment for purposes of the Act where such amount is a superannuation or pension benefit and must include the full amount in computing the recipient’s income for Canadian tax purposes.

We trust our comments are of assistance.

Yours truly,

Charles Taylor
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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