2022-0929731I7 Articles 18(2) and (3) of the Canada-Italy Treaty

Principal Issues: Where an individual resident in Italy receives CPP and OAS payments, how does Article 18 of the Canada-Italy Tax Treaty apply?

Position: Article 18(2) applies to the CPP payments and Article 18(3)(b) applies to the OAS payments.

Reasons: While both CPP and OAS payments are pensions for the purpose of the Canada-Italy Tax Treaty, only OAS payments are considered social security benefits under that treaty in accordance with paragraph (j) of the Protocol to the treaty.

Author: Graham, Kanwal
Section: Paragraph 212(1)(h); Articles 18(2) and 18(3) of the Canada-Italy Tax Treaty.

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Individual Program Support Section                      Income Tax Rulings Directorate
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Contact Centre Services Directorate                      K. Graham
Assessment, Benefit and Service Branch

                                                                               2022-092973

Application of the Canada-Italy Tax Treaty to CPP and OAS benefit payments

This is in reply to your e-mail enquiry of March 8, 2022 regarding the application of the Convention Between The Government Of Canada And The Government Of The Italian Republic For the Avoidance of Double Taxation With Respect to Taxes on Income and the Prevention of Fiscal Evasion (“Treaty”) to Canada Pension Plan (“CPP”) and Old Age Security (“OAS”) benefit payments made to an individual that is resident in Italy.

You have considered a hypothetical scenario whereby an individual resident in Italy receives periodic CPP and OAS benefit payments. Your view of the application of the Treaty can be summarized as follows:

* The Treaty permits Canada to tax both CPP and OAS benefit payments but specifies limits on such tax.

* Article 18(2) of the Treaty limits the tax on Canadian-source pension income (including CPP) to the lesser of 15% of the total such income exceeding $12,000 and the amount of tax that a resident of Canada would pay on that income.

* Article 18(3) of the Treaty limits the tax on OAS income to the amount that a resident of Canada would pay on that income.

You have asked for our confirmation of your interpretation of Treaty as it applies to the CPP and OAS.

Our comments

Where an individual not resident in Canada receives a Canadian-source pension benefit, the amount is generally subject to withholding tax under paragraph 212(1)(h) of the Income Tax Act (“Act”) at a rate of 25%, unless the withholding tax is reduced or eliminated under a tax treaty between Canada and the country in which the recipient of such payments is resident. The term “pension” is not defined in the Treaty. In such a case, section 5 of the Income Tax Conventions Interpretations Act provides a definition of the term “pension” in respect of payments that arise in Canada. Both the CPP and OAS are normally considered pensions for purposes of Canada’s tax treaties.

Article 18 of the Treaty pertains to pensions and reads, in part, as follows:

“1. Pensions arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such pensions may also be taxed in the Contracting State in which they arise and according to the laws of that State but, in the case of periodic pension payments, the tax so charged shall not exceed the lesser of

(a) 15 per cent of the gross amount of such periodic pension payments paid to the recipient in the calendar year concerned that exceeds twelve thousand Canadian dollars or its equivalent in Italian currency, and

(b) the rate determined by reference to the amount of tax that the recipient of the payment would otherwise be required to pay for the year on the total amount of the periodic pension payments received by the resident in the year, if the recipient were resident in the Contracting State in which the payment arises.

3. Notwithstanding any provision of this Convention:

…

(b) benefits under the social security legislation in a Contracting State paid in a calendar year to an individual who is a resident of the other Contracting State shall be taxable only in the State in which they arise and according to the laws of that State but the tax so charged shall not exceed the amount that the recipient would otherwise be required to pay in that year if the recipient were a resident of that first-mentioned State…”

The Protocol of Understanding (“Protocol”) to the Treaty contains additional provisions, including paragraph (j) which states, in part, the following:

“(j) For the purposes of subparagraph (b) of paragraph 3 of Article 18, the term “social security” means:

(a) in the case of Canada, any pension or benefit paid under the Old Age Security Act of Canada”

While both CPP and OAS payments may generally be considered to be social security benefits, only the OAS payments are considered to be social security benefits under the Treaty in accordance with paragraph (j) of the Protocol.

CPP payments

Where an individual resident in Italy receives CPP payments, those payments are generally considered pension income that arises in Canada. Under Article 18(2) of the Treaty, Canada may tax pension income (which includes CPP) arising in Canada in accordance with the laws of Canada. However, where the payments are periodic pension payments, Article 18(2) of the Treaty limits the amount of tax to the lesser of 15% of the total gross amount of Canadian-source periodic pension payments that exceed $12,000 and the rate of tax that the recipient would pay if the recipient were resident in Canada (hereafter referred to as the “as-if-resident” or “AIR” amount). The rate of tax determined as an AIR amount is normally computed using the individual’s world income.

If a resident of Italy receives a Canadian-source pension payment that is not a periodic pension payment, then Canada is entitled to tax the payment at a rate of 25% pursuant to paragraph 212(1)(h) of the Act and in accordance with Article 18(2) of the Treaty.

OAS payments

Although Article 18(2) of the Treaty does not explicitly exclude social security payments, paragraph (j) of the Protocol stipulates that any pension or benefit paid under the Old Age Security Act of Canada is a social security benefit for the purpose of Article 18(3)(b) of the Treaty. When OAS payments are made to a resident of Italy, Canada has exclusive rights as the source state to tax the payments, whether or not such amounts are periodic pension payments notwithstanding any other elements of the Treaty which includes Article 18(2). In accordance with Article 18(3)(b) of the Treaty, the tax on OAS payments is computed under the laws of Canada but the tax may not exceed the AIR amount.

Thus, if a resident of Italy receives OAS payments, Canada is entitled to tax the payment at the AIR amount, unless the rate of tax determined using the AIR amount exceeds the rate of tax computed under the laws of Canada. In most cases, that rate of tax is 25% in accordance with subsection 212(1).

One consequence of the different treatment is that unless the AIR amount is NIL, two separate calculations will be required in respect of CPP and OAS amounts paid to a resident of Italy.

We trust our comments are of assistance.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of a taxpayer.

Yours truly,

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

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