Contact UsMy Client is Ex SA, where he contributed to a South African Retirement Fund. This is neither a compulsory or employment linked pension fund.
The voluntary fund was pre-funded by a lump sum contribution paid on resignation from an employer pension fund. It is our interpretation that SA retirement annuities (RA’s) pre-funded by so-called legacy contributions (initial lump sums) may qualifies as an "employee benefit plan" and all or part of the pension is attributable to services rendered in a period during which the recipient was not resident in Canada. Only the resident portion is brought into CIAT income under paragraph 6(1)(g) and could perhaps even be excluded under subparagraph 56(1)(a)(i) of CITA. CRA replied that it was an SA pension fund and duly taxable in Canada. The benefit was paid in SA as a lump sum, i.e. contributions were a single lump sum contributed from remuneration earned in SA before becoming Canadian tax resident. The benefit paid is a single lump-sum. DTA article 18 deals with pension and annuities only. Article 21 is the applicable article, we suggest; therefore, CRA may NOT tax the lumpsum. Where do we go wrong on this one
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Tax Professional Answers
Claudia Ku CPA, CA, MBA
It sounds like that the South Africa retirement annuities (“SARA”) that you have described are some kind of retirement arrangement established under the laws of South Africa. As such, any amounts received under the SARA would be taxable under S.56(1)(a)(I)(C.1) unless the amount would not be taxable in SA if your clients were resident in SA.
The exception under S.56(1)(a)(I)(D) applies if the “pension” amounts are taxable under paragraph 6(1)(g) as benefits received under an “employee benefit plan (EBP)”, taking into consideration of the exclusion under paragraph 6(1)(g)(II). If the SARA qualified as an “employment benefit plan” as defined under the Canada Income Tax Act, it would not be taxable under paragraph 6(1)(g) by virtue of the exclusion provided under subparagraph 6(1)(g)(III) (i.e., the benefits were attributable to services rendered by a person in a period throughout which the person was not resident in Canada). As such, the SARA would not qualify for the exception under S.56(1)(a)(I)(D) as it would not be taxable under paragraph 6(1)(g).
It appears that Article 18 (Pensions and Annuities) of the DTA should apply as the lump sum amount appears to be “pension” received under some kind of retirement arrangement established under the laws of South Africa, regardless of whether it is periodic or lump sum payment. Under Article 18, both South Africa and Canada have the right to tax the lump sum pension amount.
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488 weeks ago
The exception under S.56(1)(a)(I)(D) applies if the “pension” amounts are taxable under paragraph 6(1)(g) as benefits received under an “employee benefit plan (EBP)”, taking into consideration of the exclusion under paragraph 6(1)(g)(II). If the SARA qualified as an “employment benefit plan” as defined under the Canada Income Tax Act, it would not be taxable under paragraph 6(1)(g) by virtue of the exclusion provided under subparagraph 6(1)(g)(III) (i.e., the benefits were attributable to services rendered by a person in a period throughout which the person was not resident in Canada). As such, the SARA would not qualify for the exception under S.56(1)(a)(I)(D) as it would not be taxable under paragraph 6(1)(g).
It appears that Article 18 (Pensions and Annuities) of the DTA should apply as the lump sum amount appears to be “pension” received under some kind of retirement arrangement established under the laws of South Africa, regardless of whether it is periodic or lump sum payment. Under Article 18, both South Africa and Canada have the right to tax the lump sum pension amount.
Question Owner
Thank you, very eloquently explained. In this case, the SARA was funded from a legacy fund (EBP in your terminology) and the SARS was a "preservation vehicle" as we have no central government fund. When one leaves a private employers' fund, you have to transfer the benefit to either a preservation fund or an SARA. Will they be able to benefit arguing that the SARS was in this case an extension of the EBP as it was ONLY funded from contributions to an EBP in CRA non-resident periods?
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488 weeks ago