Foreign Pension Income Taxation – A Canadian Tax Lawyer Analysis

Many immigrants had a career before they moved to Canada and they might be eligible to receive a foreign pension from another country. Since Canadian residents are taxed on their worldwide income, new immigrants are often taken by surprise that their foreign pension payments could be subject to Canadian tax even though the amounts may not be taxable in the country paying the pension. To avoid this nasty surprise, it is important to seek proper legal assistance from an experienced tax lawyer in Canada.

How to report foreign pension income on your tax return

When foreign pension income is regarded as taxable income, it should be reported in Canadian dollars on line 11500 of the person’s T1 return. The pensioner can sometimes choose to receive the payments either in a lump sum or periodically. The former requires the pensioner to convert the foreign lump sum payment into Canadian dollars using the exchange rate on the day the payment went into the account, while the latter uses an average conversion rate during the period the person received those payments.

How to avoid double taxation

Since foreign pension income is sometimes taxable in the home country where it originates, a double taxation problem arises when it is taxed again in Canada. However, there are several methods to mitigate the effect of double taxation.

Tax treaties may set out specific rules or agreements that deem all or part of your pension income as non-taxable. Therefore, it’s always a good practice to consult with a Canadian tax lawyer to review the specific provisions of the tax treaty. If the pension income is indeed exempted, you can claim a deduction for the amount on line 25600 of your tax return.

If the treaty doesn’t contain such exemption provisions, you may still reduce your tax burden by claiming foreign tax credits on the amount of tax you already paid for the pension income in another country. Under this scenario, you need to fill form T2209 Federal Foreign Tax Credit to calculate the credits, and report the amount on line 40500 of your income tax return.

Two recent cases that delve into foreign pension income taxation

Let’s look at two recent cases decided in 2019 that shed some light on this issue.

2157. Rasmussen v The Queen, 2019 TCC 124; [2019] 4 CTC 2157.

This case dealt with a former Queensland police officer in Australia who immigrated to Canada in 2013 after his retirement. During the time he was employed in Australia, both the police officer and his employer contributed to QSuper, a superannuation fund for Queensland government employees. Upon his retirement, he chose to receive pension payments periodically. In 2015, he received pension income of $60,963 and claimed a deduction for the same amount when he filed his 2015 tax return. After the Minister of National Revenue reassessed his 2015 tax return and denied the deduction, he appealed to the tax court.

After consulting the Income Tax Act, the tax treaty between Canada and Australia and case law, the judge ruled that his foreign pension income should be taxable in Canada. The court set out several reasons in its analysis:

1. Under section 61(g) and 56(1) of the Income Tax Act, any payment received from a superannuation or pension benefits is generally considered taxable Canadian income even if it’s from a foreign pension plan.
2. Although the Income Tax Act does not define what a superannuation or pension plan is, the court reviewed case law and found that a superannuation or pension plan is generally an arrangement that provides for payment of regular post-retirement income to former employees that is made in accordance to the terms of a plan rather than at the discretion of the beneficiary.
3. The tax treaty between Canada and Australia also does not prohibit Canada from taxing the pension benefits received from the police officer’s Australian superannuation plan.

113. Reyes v The Queen 2019 FCA 7; [2019] 6 CTC 113.

This case involved a similar situation to the first case where a former Columbian worker, Mr. Reyes, moved to Canada in 2007 and became a Canadian resident. Mr. Reyes started receiving pension benefits from Colombia since 2014 and when he filed his income tax return in 2014 and 2015, he reported the pension income but deducted the same amount for both years. The Minister of National Revenue denied his duction and the decision was upheld by the tax court, Mr. Reye then appealed to the federal court of appeal.

After consulting the Income Tax Act and the tax treaty between Canada and Colombia, the federal court of appeal upheld the tax court’s decision that the deduction should be denied. The reasons are:

1. The Colombian pension income was properly included as taxation income in Canada under Paragraph 56(1)(a) of the Income Tax Act.
2. Under the tax treaty between Canada and Colombia, Canada is entitled to tax his Colombian pension benefits as the country of residence.

Mr. Reyes also argued that the “right to social security” from the Universal Declaration of Human Rights (UNDHR) and Article 9 of the International Covenant on Economic, Social and Cultural Rights (the “Covenant”) should prevent Canada from taxing his Colombian pension income. However, the Federal Court of Appeal ruled that neither of them “deal with taxation per se” and “could not have had any impact on the interpretation” adopted by the tax court.

Unreported foreign pension income – Voluntary Disclosure Program

If you have received offshore pension income that is not exempted, you should report them on your tax return. Failure to do so could lead to serious financial and legal consequences. In fact, Canada Revenue Agency (“CRA”) even offers a snitch line for people to report tax evaders and awards the informer a commission based on the amount of tax collected. Luckily, the Voluntary Disclosure Program (“VDP”) is designed for taxpayers to come forward with unreported income in exchange for relief from penalties, interest and criminal prosecution.

A Voluntary Disclosure application must meet the following requirements in order to be accepted:

1. It must be voluntary;
2. The information provided must be complete;
3. The disclosed information must be one year past due;
4. The information provided must be related to a penalty;
5. You must provide payment for the estimated taxes owing.

However, whether the CRA decides to accept your Voluntary Disclosure application depends on the specific circumstances of your case. Therefore, it is highly recommended that you consult with an experienced Canadian tax lawyer if you have unreported pension income.

Pro tax tips – foreign pension income

The situations in these two recent cases are unfortunate, therefore it is critical for anyone receiving foreign pension income to seek professional advice from an experienced tax lawyer in Canada to minimize the tax burden on his foreign pension income. If you have unreported offshore pension income, contact our office to speak with one of our experienced Canadian tax lawyers about the Voluntary Disclosure Program (“VDP”). By participating in the VDP, you might be able to eliminate tax penalties, reduce interest and avoid criminal tax prosecution.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch