Introduction: Canadian Tax Implications for Canadian Taxpayers Who Receive Foreign-Pension Benefits
When computing income for a particular tax year, a Canadian taxpayer must report any superannuation or pension benefit received in that year, as required by subparagraph 56(1)(a)(i) of Canada's Income Tax Act. And because a Canadian tax resident is liable to pay Canadian income tax on income earned worldwide, a Canadian-resident taxpayer must report as income any superannuation or pension benefits from a foreign pension plan, and the foreign-pension benefits remain taxable in Canada even if the taxpayer's contributions were not deductible in the source country (Schaub v The Queen, 2014 TCC 212).
But paragraph 60(j) of Canada's Income Tax Act allows qualifying taxpayers to bring their foreign pensions to Canada on a tax-neutral basis.
This article discusses the requirements of the RRSP tax rollover under paragraph 60(j).
The Tax Rollover When Transferring Foreign-Pension Benefits to a Registered Retirement Savings Plan (RRSP): Paragraph 60(j) of Canada's Income Tax Act
Paragraph 60(j) effectively allows a Canadian tax resident to cash out a foreign pension and transfer the proceeds to an RRSP on a tax-deferred basis. The taxpayer still reports the foreign pension as income, but, if the taxpayer satisfies the conditions of subparagraphs 60(j)(i), 60(j)(iii), and 60(j)(iv), the taxpayer may fully deduct the foreign pension by transferring it to a registered retirement savings plan.
Notably, the deduction under paragraph 60(j) doesn't depend on a taxpayer's RRSP contribution room. Nor does it affect the taxpayer's deduction limit for RRSP contributions in the same tax year or in future tax years. So, the foreign-pension proceeds are essentially rolled into the registered retirement savings plan on a tax-neutral basis.
The Requirements for Claiming the Foreign-Pension Tax Rollover under Paragraph 60(j)
To qualify for the RRSP tax rollover under paragraph 60(j), a taxpayer must meet six requirements:
First, the foreign-pension benefit must constitute "a superannuation or pension benefit payable out of or under a pension plan that is not a registered pension plan." A superannuation or pension benefit "includes any amount received out of or under a superannuation or pension fund or plan," and it "includes any payment made to a beneficiary under the fund or plan [...] in accordance with the terms of the fund or plan [or] resulting from the termination of the fund or plan" (see the definition of "superannuation or pension benefit" in subsection 248(1) of the Income Tax Act). According to the CRA, a foreign pension plan constitutes a "superannuation or pension fund" only if (a) the plan requires contributions from an employer or former employer (i.e., the contributions do not come solely from the employee) and (b) those contributions serve to provide an employee with an annuity or other periodic payment on or after retirement (see: CRA Technical Interpretation 2012-0468271E5, "UK Pension Transfer to Canada, March 12, 2013. CRA Interpretation Bulletin 2000-0019865, "United Kingdom Pension, transfer to registered retirement savings plan," July 6, 2000.). In addition, the pension benefit must come from a plan that "is not a registered pension plan." A "registered pension plan" refers to a pension plan that has been registered in Canada under section 147.1 of the Income Tax Act.
The second requirement under paragraph 60(j) is that the foreign-pension benefit cannot be "part of a series of periodic payments"—i.e., it must be a lump-sum payment. A pension benefit will satisfy the lump-sum-payment requirement to the extent that it represents a settlement of future entitlements under the foreign plan. But if a portion of the lump-sum payment doesn't represent a settlement of future entitlements—a payment for periodic pension in arrears, for instance—that portion is not deductible under paragraph 60(j) (see: CRA Technical Interpretation 2012-0468271E5, "UK Pension Transfer to Canada, March 12, 2013.).
The third requirement is that the foreign-pension benefit must be "attributable to services rendered by the taxpayer [or by the taxpayer's spouse, common-law partner, former spouse, or former common-law partner] in a period throughout which that person was not resident in Canada." Three rules bear on an individual's status as a tax resident in Canada. First, an individual may be a Canadian tax resident under common law. Second, even if the individual is not a common-law resident, the individual may be deemed to be a Canadian tax resident under paragraph 250(1)(a) of Canada's Income Tax Act. Third, an individual may be deemed a non-resident in Canada under subsection 250(5) of the Income Tax Act. Tax residence is distinct from residence for immigration purposes: You can be a Canadian tax resident even if you aren't a Canadian permanent resident or Canadian citizen, and you can be a Canadian citizen or permanent resident yet fail to be a Canadian tax resident. For more information on determining your status as a tax resident, see our article "Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada?" A person's status as a Canadian tax resident depends on several interrelated, complex tax rules, and it may require a careful analysis of not only Canada's domestic tax law but also the tax rules in a tax treaty between Canada and another country. Our experienced Canadian tax lawyers can provide you with advice on your status as a tax resident in Canada.
The fourth requirement under paragraph 60(j) is that the claiming taxpayer must report the amount of the foreign-pension benefit as income for the year in which the benefit was received. If the foreign-pension benefit qualifies for a deduction subparagraph 110(f)(i) of the Income Tax Act (i.e., the deduction for tax-exempt status under a tax treaty), the taxpayer cannot deduct any portion of the foreign-pension benefit on that basis.
The fifth requirement is that the taxpayer must contribute the amount of the foreign-pension benefit to his or her RRSP within 60 days after the end of the year in which the taxpayer received the foreign-pension benefit. If you fail to transfer the foreign-pension proceeds to your registered retirement savings plan before this deadline expires, you lose the rollover entirely. If the RRSP transfer hasn't been made in time, no relief is available—neither the CRA nor the Tax Court of Canada has discretion to retroactively allow the paragraph 60(j) deduction (see: Barel v The Queen, 2009 TCC 156).
Finally, the sixth requirement is that the taxpayer must designate the RRSP contribution as a transfer under subparagraph 60(j)(i). The taxpayer does so by identifying the amount of the contribution as an RRSP transfer on Schedule 7 of the taxpayer's T1 income-tax return.
Pro Tax Tips: Qualifying for Foreign-Pension/RRSP Tax Rollover under Paragraph 60(j)
As mention above, the paragraph 60(j) tax rollover requires that the foreign pension relate to services rendered while the employee was a non-resident in Canada. Certain taxpayers might find it exceedingly difficult to determine whether they were a non-resident in Canada for tax purposes. This is especially true for taxpayers whose employment required them to enter Canada frequently or spend significant time in Canada. A residence-determination request is one measure for obtaining certainty when preparing your Canadian tax return. You can submit a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada). In response, the CRA will provide you its opinion on your status as a Canadian tax resident. Still, the CRA's opinion is only as reliable as the details you provide. And the CRA's administrative view doesn't always correspond with Canada's tax law. As a result, your residency-determination application must not only frame the relevant facts but also bring attention to the case law favoring your position. Otherwise, the CRA agent appraising your residence-determination application might render an unfavorable decision that follows the CRA's view yet ignores the law. Moreover, the CRA's residence-determination forms (i.e., the NR73 and NR74 forms) ask rather intrusive questions about finances and assets. So, you should seriously consider whether you want to send this information to the Canada Revenue Agency unprompted. Our experienced Canadian tax lawyers can provide you with advice on your status as a tax resident in Canada. We can discuss whether a residence-determination request is appropriate in your circumstances. If it is, we can prepare your residence-determination application so that it contains the needed factual and legal analysis. If a residence-determination request is inappropriate, we can discuss other alternatives to meet your needs.
The paragraph 60(j) tax rollover comes with a strict deadline. You will lose the rollover entirely if you haven't transferred the foreign-pension proceeds to your registered retirement savings plan within 60 days after the end of the year in which the you received the foreign-pension benefit. In other words, if you receive the foreign-pension benefit today, you must transfer the funds to your RRSP before March 1st of next year.
The paragraph 60(j) tax rollover is not restricted solely to the individual who actually receives the lump-sum payment from the foreign plan. The deducting taxpayer need not be a member of the pension plan from which the pension benefit stems. Neither paragraph 60(j) nor the ITA's definition of "superannuation or pension benefit" requires that the benefit be paid to a plan member or beneficiary. Subsection 248(1) of the ITA defines a "superannuation or pension benefit" as "any amount received out of or under a superannuation or pension fund or plan." Although the definition "includes any payment made to a beneficiary under the fund or plan," it is not restricted to this class of payees. The deduction is available if the pension benefit is attributable to services rendered by a taxpayer's "spouse or common-law partner or former spouse or common-law partner in a period throughout which that person was not resident in Canada." In other words, if the pension benefit relates to services that the plan beneficiary rendered while a non-resident, the plan beneficiary's spouse, common-law partner, former spouse, or former common-law partner may claim the deduction (so long as the other requirements are satisfied).
Moreover, paragraph 60(j) does not demand that the lump-sum payment be made by a direct transfer from the foreign plan to the qualifying taxpayer's registered retirement savings plan. Hence, if the pension-benefit proceeds are initially deposited into an unregistered account held by the taxpayer, the taxpayer will not thereby fail to qualify for the paragraph 60(j) deduction. Likewise, if the plan beneficiary's spouse intends to claim the deduction and the pension-benefit proceeds are initially deposited into an unregistered account held by the beneficiary, the spouse will not thereby fail to qualify. Of course, in each case, the taxpayer claiming the deduction must subsequently transfer the pension-benefit proceeds to his or her RRSP within 60 days after the end of the year in which the taxpayer received the proceeds. As mentioned above, missing the strict deadline disqualifies the transfer. Therefore, the tax-planning advice of our knowledgeable Canadian tax lawyers is to have the funds transferred directly into the RRSP, thereby avoiding any risk of missing the deadline.
Subsections 146(21.1) and 147.5(11) of the Income Tax Act contain similar tax-rollover rules for transferring a foreign pension to a Saskatchewan Pension Plan or a pooled registered pension plan on a tax-deferred basis. So, you may opt to transfer your foreign pension to one of these plans instead of transferring it to a registered retirement savings plan under paragraph 60(j).
Consult one of our expert Canadian tax lawyers for advice on whether your foreign pension qualifies for the RRSP tax rollover under paragraph 60(j), the tax rollover to a Saskatchewan Pension Plan under subsection 146(21.1), or the tax rollover to a pooled registered pension plan under subsection 147.5(11). Our skilled Canadian tax lawyers can also provide tax-planning advice so that you may minimize Canadian tax on your foreign pensions.