ARCHIVED - Exempt portion of pension when employee has been a non-resident

What the "Archived Content" notice means for interpretation bulletins

NO.: IT-76R2

DATE: September 3, 1982

SUBJECT: INCOME TAX ACT
Exempt Portion of Pension When Employee Has Been a Non-Resident

REFERENCE: Paragraph 212(1)(h)

This Bulletin replaces and cancels Interpretation Bulletin IT-76R. Current revisions are designated by vertical lines.


Notice to the reader:


1. Information Circular 77-16R dated May 4, 1981 describes the types of payments made to non-residents that are subject to withholding tax at source, the method of payment of the tax, and the procedure for obtaining a refund of withholding tax where applicable. This bulletin deals with the portion of pension benefits paid to non-residents of Canada which is exempt from withholding tax at source under paragraph 212(1)(h) of the Act.

2. Where pension benefits are paid after 1979 in respect of a person who was throughout any particular calendar year not employed in Canada (or only occasionally employed in Canada) and not resident in Canada, the portion of such benefits that may reasonably be regarded as attributable to services rendered in any such year(s) is not subject to non-resident tax. For payments made in 1979 and prior years this exemption applied only to payments reasonably attributable to services rendered in years throughout which the person was neither resident in Canada nor employed in Canada. The Department interprets the words "only occasionally employed in Canada" to mean that, throughout a particular taxation year, the taxpayer's regular place of employment was outside Canada and his duties in Canada were limited to a few brief visits to carry out the duties of his employment.

3. In cases where a portion of pension benefits is not subject to non-resident tax, it will be necessary to determine the taxable portion of each payment. The basis of allocation to be used will depend upon the type of pension plan involved. As stated in paragraph 6(i) of Information Circular 72-13R7 dated December 31, 1981 entitled "Employees' Pensions Plans", the types of plans acceptable for registration purposes under the Act are the defined benefit plan and the money purchase plan. A defined benefit plan defines the benefits to be paid to each member, regardless of the cost or earnings experience, and nearly always has years of service as one factor, whereas a money purchase plan defines the contributions placed to the credit of each member and the pension is whatever amount these contributions plus earnings thereon will provide. Thus, for payments made after 1979, formula (a) below may be regarded as a reasonable basis of allocation for defined benefit plans and formula (b) for money purchase plans. These formulas should cover most plans currently in use. If a pension plan provides for both a defined benefit and a money purchase arrangement the relevant formula below must be used in respect of each type of benefit

(a)

(A ÷ B ) × C = D

A = number of years of pensionable service of the employee, each of which is a year

(i) in respect of which contributions have been made by or in respect of the employee, and

(ii) during which the employee was at any time either employed in Canada (unless only occasionally employed in Canada) or resident in Canada

B = total number of years of pensionable serviceof the employee

C = pension payment

D = portion of payment subject to tax

(b)

(A ÷ B ) × C = D

A = aggregate of contributions to the plan made at any time by or in respect of the employee for pensionable service in respect of taxation years each of which is a year during which the employee was at any time employed in Canada (excluding years when he was only occasionally employed in Canada) or was resident in Canada

B = total contributions made by or in respect of the employee in respect of periods of pensionable service

C = pension payment

D = portion of payment subject to tax

4. If the taxpayer can establish a more reasonable basis of allocation of the pension payment between the resident and non-resident years of the employee in respect of whom it is paid, that basis will be acceptable to the Department.

5. Where a payee claims that a portion of a pension payment is exempt from non-resident tax, the payer must obtain satisfactory evidence that the employee, in respect of whom the payment is made, was neither resident in Canada nor employed (other than occasionally) in Canada at any time in any taxation year to which that portion of the payment can reasonably be attributed.

6. Where a pension benefit is paid to a non-resident trust, estate or heir after the death of the pensioner, the exemption under paragraph 212(1)(h) also applies to the portion thereof that may reasonably be regarded as attributable to the years in which the late pensioner was neither resident nor employed (or only occasionally employed) in Canada.

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