Foreign Pension Income: Tax Implications for Canadian Residents

Posted on by Tax Partners
30
Dec

Introduction: Reporting Foreign Pension Income in Canada
Many individuals who have had careers abroad before immigrating to Canada may be eligible to receive foreign pension income. However, Canadian residents are taxed on their worldwide income, including pensions from foreign sources. This often surprises new immigrants, especially when foreign pensions are non-taxable in the country of origin. To navigate these complexities, consulting with a professional Canadian accountant is essential.

Reporting Foreign Pension Income on Canadian Tax Returns

Foreign pension income regarded as taxable in Canada must be reported in Canadian dollars on Line 11500 of the T1 tax return. Depending on how the pension payments are received, the reporting process differs:

  1. Lump Sum Payments: Convert the foreign payment into Canadian dollars using the exchange rate on the day the payment was deposited.
  2. Periodic Payments: Use an average exchange rate for the period during which the payments were received.

Avoiding Double Taxation

Foreign pension income may be taxable in its country of origin, which can result in double taxation when Canada also taxes the income. However, Canadian taxpayers have options to mitigate this burden:

  1. Tax Treaties
    Many countries have tax treaties with Canada to prevent double taxation. These treaties often outline whether foreign pension income is exempt from Canadian taxes or partially deductible. If a tax treaty applies, you can claim a deduction for the exempted amount on Line 25600 of your tax return.
  2. Foreign Tax Credits
    If no exemption applies, you may claim a foreign tax credit for taxes paid in the country of origin. Use Form T2209 – Federal Foreign Tax Credit to calculate the credit and report it on Line 40500 of your tax return.

Case Studies: Foreign Pension Taxation in Canada

Case 1: Rasmussen v The Queen, 2019 TCC 124

  • A retired Queensland police officer moved to Canada in 2013 and received periodic payments from his Australian superannuation fund.
  • He claimed a deduction for his pension income on his 2015 tax return, but the CRA denied the deduction, and the tax court upheld this decision.

Key Takeaways:

  • Under the Income Tax Act, foreign superannuation and pension income is taxable in Canada.
  • The Canada-Australia tax treaty did not prevent Canada from taxing this pension.

Case 2: Reyes v The Queen, 2019 FCA 7

  • A former Colombian worker moved to Canada in 2007 and started receiving pension benefits from Colombia in 2014. He deducted the pension income from his Canadian tax returns, but the CRA denied the deduction.
  • The federal court upheld the CRA’s decision, stating that Canada, as the country of residence, is entitled to tax his Colombian pension income.

Key Takeaways:

  • Tax treaties allow Canada to tax foreign pensions if the recipient resides in Canada.
  • International agreements like the Universal Declaration of Human Rights (UNDHR) cannot override Canada’s taxation rules.

Unreported Foreign Pension Income & The Voluntary Disclosure Program (VDP)

Failing to report foreign pension income can lead to penalties, interest, or even criminal prosecution. The Voluntary Disclosure Program (VDP) provides taxpayers an opportunity to come forward with unreported income and potentially receive relief from penalties and prosecution.

VDP Requirements:

  • The disclosure must be voluntary.
  • The information provided must be complete.
  • The disclosure must involve information at least one year overdue.
  • The disclosed issue must relate to a penalty.
  • Payment for estimated taxes owing must accompany the application.

Each application is reviewed on a case-by-case basis, so working with an experienced Canadian accountant can improve your chances of acceptance.

Pro Tax Tips: Handling Foreign Pension Income

  1. Stay Informed About Tax Treaties:
    Review tax treaties between Canada and the country of origin to determine if any exemptions or credits apply.
  2. Seek Professional Advice:
    A qualified Canadian tant can help minimize your tax burden, ensure compliance, and avoid potential penalties.
  3. Use the Voluntary Disclosure Program (VDP):
    If you’ve received unreported foreign pension income, participate in the VDP to reduce penalties and avoid prosecution.

Conclusion
Foreign pension income is a critical aspect of tax compliance for Canadian residents. Whether you’re unsure about reporting requirements or have unreported pension income, consulting with an experienced Canadian accountant is essential. 

By leveraging expert advice, you can navigate tax complexities, avoid penalties, and ensure compliance with the Canada Revenue Agency’s requirements.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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