How the new Canada-Italy Tax Convention affects the taxation of pension payments and social security benefits received (Revised)

The new Canada – Italy Income Tax Convention (the "2002 Convention") signed on June 3, 2002 entered into force on November 25, 2011. This new convention replaces the 1977 Canada – Italy Income Tax Convention amended by the 1989 Protocol (the "1977 Convention").

Important changes have been made in respect to the taxation of pension payments and social security benefits received. The following explains the application of the 2002 Convention to residents of Canada who receive pension benefits from Italy (Canadian resident pensioners) and residents of Italy who receive pension benefits from Canada (Italian resident pensioners).

Canadian Resident Pensioners

Italian Social Security Benefits

Changes to the taxation of Italian pensions paid to Canadian residents provide that only Italy can tax the supplement and military service portion of Italian Social Security Benefits ("the Italian supplement"). The 2002 Convention eliminates the $24,000 threshold under the 1977 Convention to determine if the Italian supplement is exempt from tax in Canada.

The Italian supplement is the portion of Italian Social Security Benefits for which no direct contributions were made and that is required to bring the pension to a minimum level under Italian Social Security laws. The amount of Italian supplement will be certified in a document sent to pensioners by Italy.

You will continue to include the amount of Italian Social Security Benefits received on line 115 of your Canadian income tax and benefit return and claim a deduction for the amount of pension exempt from tax on line 256.

Other Italian Periodic Pensions

The 2002 Convention exempts Canadian residents from having to pay Italian tax on the first $12,000 of Italian periodic pensions other than the Italian supplement, pensions paid to war veterans and Pensions for Government Service. The amount of any such Italian periodic pensions that exceeds $12,000 will be subject to a maximum 15% tax in Italy. You will continue to include the amount of other Italian periodic pensions received on line 115 of your Canadian income tax and benefit return. Canada will continue to provide a foreign tax credit for Italian taxes paid to the extent that taxes are payable on these pensions in Canada.

Pensions for Government Service cover pensions paid, by or out of funds created by, the Italian State or a political or administrative subdivision or a local authority thereof to an individual in respect of services rendered to the Italian State or subdivision or authority. Pensions for Government Service to Italy remain exempt from tax in Canada.

There is also no change to pensions paid to war veterans and the amount that would be exempted from tax in Italy will continue to be exempted from tax in Canada.

Italian Resident Pensioners

Old Age Security (OAS) Pension benefits

Changes to the taxation of Canadian pensions paid to Italian residents provide that only Canada can tax Old Age Security (OAS) Pension benefits. The maximum withholding tax in Canada on OAS increases to 25%. You may be eligible for a reduced tax rate by filing a Canadian tax return as if you were a resident of Canada for tax purposes. You can do this by filing a Canadian income tax and benefit return with us within two years from the end of the taxation year in which you receive the income.

You may also be eligible for a reduced withholding tax rate by filing Form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to Be Withheld. If you have already filed a Form NR5 that is still valid you will not have to file a new Form NR5 unless your situation has changed or until we send you a new Form NR5 to complete.

In addition to this change, OAS payments are now subject to the OAS recovery tax. In order to determine the amount of recovery tax and to continue receiving the benefits, residents of Italy receiving OAS payments now have to file an Old Age Security Return of Income (OASRI) every year starting in 2011. Guide T4155, Old Age Security Return of Income Guide for Non-Residents will help you complete the OASRI.

A 2011 OASRI must be filed by April 30, 2012, to ensure that OAS payments are not interrupted and withholding tax is properly applied, starting with OAS payments for January 2013. If a 2011 OASRI is not filed, Human Resources and Skills Development Canada will suspend OAS payments starting with the payment for January 2013.

For the 2011 and 2012 tax years ONLY, if the OASRI shows a balance owing (line 485) the amount is not required to be paid unless it is more beneficial for you to start applying the 2002 Convention, starting January 1st, 2011. The purpose of filing the returns for these specific taxation years is to determine the amount of your OAS payments for 2013.

Canadian Periodic Pensions

The 2002 Convention exempts Italian residents from having to pay Canadian tax on the first $12,000 of Canadian periodic pensions other than OAS pensions and pensions paid to war veterans. The amount of Canadian periodic pensions other than OAS pensions and pensions paid to war veterans that exceeds $12,000 will be subject to a maximum 15% withholding tax in Canada. You may be eligible for a reduced tax rate by filing a Canadian tax return as if you were a resident of Canada for tax purposes. You can do this by filing a Canadian income tax and benefit return with us within two years from the end of the taxation year in which you receive the income.

You may also be eligible for a reduced withholding tax rate by filing Form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to Be Withheld. If you have already filed a Form NR5 that is still valid you will not have to file a new Form NR5 unless your situation has changed or until we send you a new Form NR5 to complete.

There is no change to pensions paid to war veterans and the amount will continue to be exempted from tax in Canada.

Canadian Non-Periodic Pensions

In the case of non-periodic pension payments the maximum withholding tax in Canada is 25%.

Entry into force provisions

The 2002 Convention is effective starting January 1st, 2011. In most circumstances, the 2002 Convention should provide pensioners with at least the same tax relief as provided in the 1977 Convention. However, where the provisions of the 1977 Convention provide for greater relief from tax, the 1977 Convention will continue to apply until December 31, 2012.

Example 1

Peter is a resident of Ontario. In 2011, he receives $30,000 of pension benefits from Italy that is payable under its social security laws. The pension includes an Italian supplement of $8,000 for which Peter made no direct contributions. These are Peter's only sources of income.

Under the 1977 Convention, Peter's tax payable in Canada in 2011 is calculated as follows:

Peter would report the amount of $30,000 of his Italian pension benefits on line 115 of his Canadian income tax and benefit return. He may claim a deduction for his Italian supplement of $8,000 on line 256 since his income from all sources that is taxable in Canada, excluding the Italian supplement, is less than $24,000.

Federal Tax


Taxable income: ($30,000 - $8,000) =

   $22,000

 

 

 

 

Multiply by the Basic Federal Tax

x       15%

 

 

 

 

Total

= $  3,300

   $ 3,300

 

 

Minus Non-Refundable Tax Credits (NRTC):

 

 

 

 

 

Basic personal amount

+ $10,527

 

 

 

 

Age amount

+ $  6,537

 

 

 

 

Pension amount

+ $  2,000

 

 

 

 

Total

= $19,064

 

 

 

 

Multiply by the NRTC rate

x       15%

 

 

 

 

Total NRTC

= $ 2,859.60

- $ 2,859.60

 

 

Basic Federal Tax

 

 

= $   440.40

   $ 440.40

 

 

 

 

 

 

Provincial Tax

 

 

 

 

 

Taxable income: ($30,000 - $8,000) =

   $22,000

 

 

 

 

Multiply by the Basic Provincial Tax

x     5.05%

 

 

 

 

Total

= $  1,111

   $ 1,111

 

 

Minus Non-Refundable Tax Credits (NRTC):

 

 

 

 

 

Basic personal amount

+ $  9,104

 

 

 

 

Age amount

+ $  4,445

 

 

 

 

Pension amount

+ $  1,259

 

 

 

 

Total

= $14,808

 

 

 

 

Multiply by the NRTC rate

x     5.05%

 

 

 

 

Total NRTC

= $     747.80

-  $  747.80

 

 

Basic Provincial Tax

 

 

= $  363.20

+ $ 363.20

Total tax payable

 

 

 

 

= $ 803.60

In addition, assuming that Peter paid $3,000 ($20,000 x 15%) of Italian tax on his Italian pension, he may claim a foreign tax credit up to his Canadian tax otherwise payable on his Italian pension ($803.60).

Under the 2002 Convention, Peter’s tax payable in Canada in 2011 is calculated as follows:

Peter would report the amount of $30,000 of his Italian pension benefits on line 115 of his Canadian income tax and benefit return. He may claim a deduction for his Italian supplement of $8,000 on line 256 as it is not taxable in Canada. In addition, assuming that Peter paid tax in Italy on his Italian pension, he may claim a foreign tax credit up to his Canadian tax otherwise payable on his Italian pension.

In this particular case, Peter would pay the same amount of tax under both conventions.

Example 2

Maria is a resident of Italy. In 2011, she receives $6,000 of OAS, $7,000 of CPP and a pension from Italy of $12,000. These are Maria’s only sources of income.

Under the 1977 Convention, Maria’s tax payable in Canada in 2011 is the least of:

  • ($13,000 - $10,000) x 25% = $750
  • $13,000 x 15% = $1,950
  • $316.27 + $368.98 = $685.25 1

= $685.25

Under the 2002 Convention, Maria’s tax payable in Canada in 2011 on her income from OAS, is the lesser of:

  • $6,000 x 25% = $1,500
  • $316.27 1

and on her income from CPP, is the lesser of:

  • 15% of the amount of $7,000 that exceeds $12,000 = $0
  • $368.98 1

= $316.27 + $0 = $316.27 2

In this particular case, Maria would pay less tax under the 2002 Convention.

________________________________

1 tax payable on Maria’s Canadian pension income as a resident of Canada. This amount is calculated as follows:

Federal tax


Taxable income:

   $25,000

 

 

 

 

Multiply by the Basic Federal Tax

x       15%

 

 

 

 

Total

= $  3,750

   $ 3,750

 

 

Minus Non-Refundable Tax Credits (NRTC):

 

 

 

 

 

Basic personal amount

+ $10,527

 

 

 

 

Age amount

+ $  6,537

 

 

 

 

Pension amount

+ $  2,000

 

 

 

 

Total

= $19,064

 

 

 

 

Multiply by the NRTC rate

x       15%

 

 

 

 

Total NRTC

= $  2,859.60

- $ 2,859.60

 

 

Basic Federal Tax

 

 

= $   890.40

   $   890.40

Multiply by the Non-Resident Surtax

 

 

x          48%

 

 

Total

 

 

= $   427.40

+ $   427.40

Total tax payable

 

 

 

 

= $1,317.80

The amount of tax payable allocated to OAS and CPP is calculated as follows:

OAS: $1,317.80 x $6,000 / $25,000 = $316.27

CPP: $1,317.80 x $7,000 / $25,000 = $368.98

2 Maria would not be subject to the OAS recovery tax since her income from all sources is below $67,668 (the threshold amount for 2011).

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