Residents of Canada are taxed on their worldwide income, including obvious sources, such as salary, professional or business income, as well as perhaps some less obvious items, like worldwide rental or investment income, whether the rental property is in Florida or the investments are held in an offshore account on a Caribbean isle.
But what has often tripped up various taxpayers over the years, particularly newer ones who have recently immigrated to Canada, is that even foreign pension income, attributable to years of service spent working for a foreign employer before becoming a Canadian resident, is generally taxable in Canada when received.
Let’s take a look at two recent cases, both decided this year, that delved into the taxation of foreign pension income.
The Australian policeman
The first case dealt with a former police officer who was employed by the Queensland Police Service in Australia from 1991 to 2013. During his period of employment, both the taxpayer and his employer contributed to QSuper, the superannuation fund for Queensland government employees.
As a Queensland police officer, his employer contributed 18 per cent of his annual salary to QSuper, while he was required to contribute six per cent of his salary, which was taken directly from his paycheque. It was not deductible in computing his income for Australian tax purposes.
In January 2013, the taxpayer retired and immigrated to Canada at the end of that year. Upon his retirement, he had the option to receive either a lump sum payment or an indexed, lifetime pension, paid biweekly. He chose the latter option.
In 2015, the year under review by the Canada Revenue Agency, the taxpayer received QSuper pension payments totalling nearly $61,000 (when converted to Canadian dollars.) The taxpayer included this amount in his pension income when he filed his 2015 Canadian tax return, but then claimed an offsetting deduction for $61,000, thereby excluding this amount from his 2015 income. In July 2016, the CRA denied the $61,000 deduction and reassessed the taxpayer’s 2015 taxation year to include the foreign pension in his income.
The taxpayer argued that the amount he excluded from his income was the “tax-free component” of his pension, as reported on his Australian payment summary stub. He felt it should not be taxable because it represented “the return of personal after-tax contributions” that he contributed, via payroll, to the pension plan.
The fundamental question before the Tax Court was whether the QSuper superannuation scheme was a pension plan for Canadian tax purposes and, if it was, were the payments received from it fully taxable as pension income in Canada.
Under the Income Tax Act, a pension includes “any amount received out of or under a superannuation or pension fund or plan and … includes any payment made to a beneficiary under the fund or plan … in accordance with the terms of the fund or plan.” Pension income, including foreign pension income, is generally taxable under the act.
The judge concluded that the amounts received by the taxpayer from the QSuper were superannuation or pension benefits and that they had to be included in his income in accordance with the rules in the Income Tax Act, notwithstanding that he was unable to deduct the contributions to the QSuper when he made them.
“It is an unfortunate situation that the (taxpayer) is required to include in his income amounts that could be viewed as a return of contributions made by him from after-tax dollars but the (taxpayer’s) appeal must be determined based on the Act as it is written,” the judge said.
The Colombian government worker
The second case involved a former government worker who came to Canada from Colombia in 2007 and has been a Canadian resident since. In 2014, he began receiving pension benefits from Colombia. He reported receiving the Colombian pension amounts when he filed his 2014 and 2015 Canadian income tax returns, but claimed offsetting deductions from income equal to the Colombian pension amounts for each year, approximately $70,000 for 2014 and $24,000 for 2015.
The CRA reassessed the taxpayer and denied these deductions on the basis that his foreign pension income was taxable in Canada. The taxpayer objected and originally went to Tax Court in 2017, where he lost, with the court concluding that the Canada–Colombia tax treaty entitled Canada, as the country of the taxpayer’s residence, to tax the taxpayer’s Colombian pension benefits. The taxpayer in early 2019 appealed this decision to the Federal Court of Appeal, arguing that the Tax Court erred in its interpretation and analysis of the tax treaty.
The appellate court found that the wording of the tax treaty “is clear in entitling the state of residence to tax pension income arising in another state, and … applies even where the pension is on account of government service.”
Nonetheless, the taxpayer fruitlessly attempted a variety of arguments in an effort to persuade the court that his foreign pension should not be taxable, including citing the Vienna Convention on the Law of Treaties, the Organization for Economic Co-operation and Development’s Model Tax Convention on Income and on Capital, and the International Covenant on Economic, Social and Cultural Rights.
The taxpayer futilely tried to argue that the Universal Declaration of Human Rights (UNDHR) “precludes the taxation of pension income because he has an internationally enshrined ‘right to social security.’” The appellate court was not persuaded by this argument, saying that “like the UNDHR, the Covenant does not deal with taxation per se and it could not have had any impact on the interpretation of the (treaty).” The court concluded the Colombian pension income was fully taxable on the taxpayer’s Canadian income tax returns.