• In general, foreign pension plan payments are taxable in Canada in
year of receipt
• Need to review when contributions were made to plan and the
characterization of plan (RCA or EBP) at that time to determine how the income will be taxed and whether any treaty relief
Canadian residents receiving distributions from
foreign plans
Resident Status When Services Performed
Services in Canada Services Outside of Canada
Resident EBP
Distributions are taxable as employment income
RCA
Distributions are taxable as pension income
EBP
Distributions are taxable as employment income
Non-Resident Foreign Pension
Distributions are taxable
Foreign Pension
Distributions are taxable
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Example
Sue, a Canadian resident, was on assignment from Australia to Canada from 2010 to 2012. In 2013, Sue decided to retire from her position and opted to remain in Canada as she grew to love the country.
Prior to Sue’s assignment she participated in her employer’s pension plan. While on assignment, Sue continued to participate in the
Australian company pension plan. Now that Sue is retired, she is
eligible to receive $5,000 per month from her company pension plan - $2,000 relates to contributions made during Sue’s Canadian service period and the balance relates to her Australian service period.
Canadian residents receiving distributions from
foreign plans
Answer:
• $2,000 contributed during Canadian service period as a resident of
Canada taxed as employment income (foreign plan treated as an EBP)
• $3,000 contributed during Australian service period as a non-
resident of Canada taxed as pension income
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Example, continued
Of the $2,000 payout relating to Sue’s service period in Canada, $500 represents her own contributions to the pension plan
Answer:
• Since $500 represents a return of contributions and no deduction
was allowed on Sue’s tax return for her contributions, only $1,500 is to included as employment income
Canadian residents receiving distributions from
foreign plans
Example
Robert worked in the US for 5 years. During this period he was a non- resident of Canada and participated in the company’s 401(k) plan. On returning to Canada, Robert left his pension in the 401(k) plan,
intending to withdraw amounts on retirement. Robert has recently retired from the company and has elected to receive a lump sum payment.
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer:
• Robert is taxable on the full amount of the payment from the plan in
the year of receipt. Robert has the option of transferring the payment to an RRSP, thus able to defer taxation on the amount until
withdrawn from the RRSP
• Robert can transfer the amount to an RRSP where:
The foreign plan meets the requirements of a pension plan under
the Act
The payment must be in the form of lump sum
The amount received must relate to services performed by the
Canadian residents receiving distributions from
foreign plans
Example
Pierre worked in France for 5 years. During this period he was a non- resident of Canada and participated in the company’s pension plan. On returning to Canada, Pierre left his pension in France intending to
withdraw amounts from the plan on retirement. Pierre has recently retired from the company and has elected to receive a lump sum payment.
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer:
• Pierre is taxable on the full amount of the payment from the plan in
the year of receipt
• However, paragraph 1, Article 18 of the Canada – France Tax Treaty
would exempt the amount from taxation in Canada
• As the lump sum amount is exempt under Treaty, Pierre is unable to
Canadian residents receiving distributions from
foreign plans
Example
Sandra recently returned to Canada after working for 8 years in the US. During this period she was a non-resident of Canada and participated in the company’s pension plan. What are Sandra’s options with respect to the amounts in the US pension plan?
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer: Option 1
• If allowed by the plan, Sandra can leave the funds in the company US
plan until she is ready to retire Option 2
• Sandra can transfer the funds to a US Individual Retirement Account
(IRA) on a tax free basis (both US and Canada) and leave the funds there until retirement
Canadian residents receiving distributions from
foreign plans
Option 3
• Sandra can transfer the funds from the US plan to a Canadian RRSP
(or RPP)
• Sandra will be subject to US income tax on the lump sum amount
withdrawn from the plan and to a early withdrawal penalty of 10%
• Sandra has to transfer the amount received to an RRSP (or an RPP)
within 60 days of the end of the year. A deduction for the
contribution to the RRSP (or RPP) can be claimed on her tax return with no affect to her RRSP contribution room.
• A foreign tax credit can be claimed on her Canadian return for US
taxes paid
• Caution: Not able to transfer employer contributions to RRSP
May 28, 2013 PwC
Polling question #4
Who in your organization is responsible for overseeing foreign pension plan participation?
• HR function • Tax function
• Global mobility function • Other / PwC participant