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Foreign Lump-Sum Payment of Deferred Pension Benefits


#1

My client has been employed for more than 20 years when he was a non-resident to Canada. He quit his job in 1995 and several months later immigrated to Canada.

In 2014 he received a lump-sum payment from his Deferred Pension Benefits at his retirement age. He received Pension Benefits each year thereafter.

My analysis of the scenario is as follow:
- lump-sum payment is made up of
a) Capital (or asset) crystalized upon his early retirement which was earned when he was
a non-resident to Canada and should have no Canadian income tax implication.
b) Annual contributions by the employer, if any, are taxable.
c) Investment returns after 1995, if any, are taxable
- Annual pension benefits

My questions are:

a) Are the lump-sum payment and annual pension benefits taxable ?
b) If yes to (a), then to what amount ? My rationale is that Mr X


#2

@
steventmhsieh

Steven,
Unfortunately pension and lump-sum payments are taxable on a CASH BASIS and not on an ACCRUAL BASIS.

In the past I filed the lump-sum payment in the year in which it was paid. I gathered all the accrual information from the payor. Then I sent a cover letter, T1Adj, working papers, and source documents to CRA to request the least tax calculation on an accrual vs the cash basis on which I filed. This goes to your Tax Centre ATTN T1 Specialty Processing. It needs to go to a special queue.

I am not sure that I understand your situation clearly.

You can be taxable in Canada even if you are a temporary resident or a deemed resident. If your client was living and working in Canada then he/she would likely be considered to be taxable in Canada.

In order to determine which amounts are taxable in which Countries/Tax Authorities, you will need to…

  1. Determine your client’s tax requirements for each country to which he/she is required to report.

This means listing all countries in which your client holds bank accounts, assets, investments, earns employment income, receives pension income, receives investment income or capital gains, receives scholarships, attends higher education taken with scholarships, grants, or awards, etc. Names on bank accounts include secondary names on snowbird accounts for child or grandchild. Investment holdings greater than the threshold amount can include dual country listed stocks. Tax reporting many include country tax filing requirements to retain dual or triple citizenship. I have a client who is a citizen of three countries and who lives, studies, or works alternately in four countries. I have many clients receiving a foreign pension, owning foreign holdings, receving investment income from foreign-held assets or businesses, and/or inheriting foreign assets from parents and/or grandparents.

  1. Residency status for each country based upon each individual country’s tax laws;

You need to establish entry and exit dates for each country with sufficient supporting documentation provided by your client or by that country’s immigration department. I ask each client to retain their plane ticket, boarding card, notarized copies of the passport with entry/exit stamps, address where they stayed, and declaration or proof of what they did in each country - vacation, study, work, etc.

  1. Primary tax residency per the new Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports

  2. Taxable income reporting requirements in each country;

Search the internet for the tax rules re temporary resident, alien, and ex-pat tax reporting requirements. That gives you a start to research your needs.

  1. Tax Treaty and how each type of income is taxed in each country and how worldwide income and foreign tax credits are treated between each pair of countries.

For Canadian tax reporting requirements, you will need to exam each of the following in order to establish which income needs to be reported and how:

  • Tax Treaty Agreement between Canada and their home country

  • Canadian Residency status for taxation in Canada

  • Primary tax residency through a “Certificate of Residency” obtained from that country’s tax authority.

Your client would obtain a certificate of residency for tax purposes from either his country or from Canada for the years in question. This is a part of a relatively new tax agreement being rolled out globally. You can find more information about this through the Multilateral Competent Authority Agreement.

Most of my experience in with UK and EU countries. I have some with the various x’stans and southeast asia, none so far with China. This is a very complex area with lots of nuance and it has taken me nearly 20 years of study, work, and tax filings to reach my current level of experience.

This OECD web link related to the EU

OECD’s Multilateral Competent Authority Agreement for the Common Reporting Standard (CRS MCAA)

http://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/

ACTIVATED EXCHANGE RELATIONSHIPS FOR CRS INFORMATION

As of 21 December 2017, there are now already over 2600 bilateral exchange relationships activated with respect to 78 jurisdictions committed to the CRS.

The details of which jurisdictions will bilaterally exchange financial account information as required under the OECD’s Multilateral Competent Authority Agreement for the Common Reporting Standard (CRS MCAA) is now available. The relationships shown include those under the framework of Article 6 of the Multilateral Convention and the CRS MCAA, as well as exchange relationships based on bilateral agreements and the EU framework.

Canada-China Income Tax Agreement - Agreement between Competent Authorities regarding paragraphs 3(a)(iv) and 3(b)(iv) of Article 11

https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/competent-authority-agreements-notices/canada-china-income-tax-agreement-agreement-between-competent-authorities-regarding-paragraphs-3-a-3-b-article-11.html

As provided for under Article 11, paragraphs 3(a)(iv) and 3(b)(iv) of the Canada-China Income Tax Agreement, 1986, the Competent Authorities for Canada and China have agreed, effective March 1, 2008, to add the following institutions for the purposes of exemption from withholding tax on interest under paragraph 3 of Article 11:

In the case of Canada:
•the Canada Pension Plan Investment Board

In the case of China:
•the National Council for Social Security Fund
•the Export Import Bank of China
•the China Export & Credit Insurance Corporation

RESIDENCY STATUS
https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/determining-your-residency-status.html

As far the establishing his residency status and taxable status - you would need to fill out a determination of residency status form for the years in questions. Normally I attach copies of the passport, work permits, proof of entry and exit dates from Canada - immigration will have copies. It takes 12-16 months to receive a written proof of entry and exit.

https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents.html

TAX TREATY COUNTRIES AND AGREEMENTS - https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/tax-treaties.html

CERTIFICATE OF RESIDENCY - https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/certificate-residency.html

SEND REQUEST TO CRA TSO
https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/certificate-residency.html#Taxpayerservicesregionalcorrespondencecentres

Residents of Canada are subject to tax in Canada on their world income (income from Canadian and foreign sources). Income from sources outside of Canada can also be taxed in the country where it was earned. But you can reduce or eliminate the amount of tax you have to pay on income from other countries if Canada has a tax treaty with them.

Some countries want a certificate of residency to prove that taxpayers who receive income from their country and want to access tax treaty benefits are, in fact, residents of Canada. These countries will ask you to give the certificate to either the payer of the income or their country’s tax administration. The certificate of residency allows them to exempt you from paying income tax or for you to pay tax at a reduced rate, based on the terms of the tax treaty between Canada and the foreign country.

A certificate of residency issued by the Canada Revenue Agency (CRA) proves only that the taxpayer has filed returns as a resident of Canada.

Google
Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports
There is a country by country rollout. Canada started to send tax info in 2017.

FOREIGN TAX REPORTING IS AN AREA SPECIALTY FOR SOME TAX FIRMS.