Foreign Pension Transfers

Canadian residents who have previ-ously worked in a foreign countryand have “superannuation or pensionbenefits” from this employmentoften find the concept of transferringthe pension to Canada an attractivealternative. Benefits of these transfersinclude a deferral of Canadian taxa-tion, greater control over invest-ments, and increased ease of admin-istration from the owner’s perspec-tive. However, there are some poten-tial pitfalls including taxation in thecountry of origin and restricted trans-ferability from the foreign country.

This article outlines the major issues involved with the transfer of a foreign pension to Canada, butbecause of the potentially significanttax consequences individuals shouldalways seek independent accountingadvice and contact the pension planadministrator.

Definition and Rules

Section 56(1)(a)(i) of the Income Tax Act states that foreign pensionincome will be taxable income inCanada if it is considered to be a“superannuation or pension benefit”,unless a tax treaty with a foreigncountry specifically states that the

income is non-taxable. A “superannu-ation or pension benefit” is generallyconsidered to be a payment from aplan in which contributions havebeen made by an employer on behalfof an employee in consideration forservices rendered by the employee orby a government and these contribu-tions are used to provide a periodicpayment on or after the employee’sretirement in consideration foremployment service.

A traditional US Individual Retire-ment Account (IRA) is the loneexception to this in that even thoughit does not meet the definition of a“superannuation or pension benefit”,section 56(1)(a) of the Income Tax Actmakes a specific provision in whichthe benefits from a traditional IRAare taxable income in Canada.Payments from a Roth IRA are notconsidered to be taxable income inCanada according to Article XVIII ofthe Canada-US tax treaty.

Canadian taxpayers are allowed totransfer a foreign pension benefit totheir RRSP without affecting theircontribution room. Under section60(j)(i) of the Income Tax Act individ-uals can claim a deduction to offsetthe income inclusion of the foreign

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pension benefit. To utilize thisrollover the benefit can either bytransferred directly to their RRSP or a contribution can be made within 60 days of the end of the year inwhich the payment was made. Therollover is also available when pay-ments are made as a death benefit toa surviving spouse or as part of adivorce or separation agreement. A pension transfer by an individualwho has turned 71 in a prior year will not be eligible for the rollover.

Issues for consideration

Although the rollover provided for inthe Canadian Income Tax Act appearsto make the transfer of a foreign pen-sion plan a relatively simple matter,there are many issues which makethis decision quite complex.

To begin with it needs to be deter-mined if the pension plan is transfer-able. Some countries prohibit thetransfer of pension plans and trans-fers in other countries are oftenrestricted at the pension plan level. It should also be determined if theentire plan can be transferred or onlya portion of it. If a transfer is allowed,are there any restrictions in terms ofthe type of plan or benefits that must

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be provided from the plan it is trans-ferred to. In most cases these ques-tions can be answered by the pensionplan administrator.

The next item of considerationshould be the tax consequences inthe country of origin of the pensionplan. Individuals should work with atax advisor with expertise in the taxlaws of the originating country todetermine the amount of foreignwithholding taxes if the plan is trans-ferred. Any penalties for the transferof the plan should also be taken intoaccount. If the plan is left in the for-eign country, the tax implications ofthis decision should be considered.

Finally, the Canadian tax implicationsshould be considered. Will there beany foreign tax credits available to theindividual on their Canadian taxreturn? If there are, will they be ableto completely offset the foreign taxa-tion or only partially offset it? If theplan is left in the country of origin,what will the Canadian tax conse-quences be?

US pension transfers

Due to the close proximity of Canadaand the US there are many Cana-dians who may be interested in trans-ferring amounts from a US pensionarrangement such as an IRA, 401(k),or 403(b) to Canada.

The most important consideration isthat a transfer will be a taxable eventin the US, as there is no rollover

recognized for US tax purposes. US citizens, US residents, and greencard holder are required to file a UStax return based on their worldwideincome and the entire pension trans-fer amount must be included inincome in the year of transfer and willbe subject to US tax at their marginaltax rate. Since the US tax system doesnot recognize an RRSP contributionas a deduction, double taxation wouldresult from this transfer. Therefore, inmost cases a pension transfer is usu-ally not in the best interests from afinancial perspective for these indi-viduals due to the fact that if the planis left in the US it will continue togrow in a tax sheltered environmentin both Canada and the US.

There may be some cases in whichan individual may wish to pursue atransfer even if they are a US citizen,US resident or green card holder. Forexample, if their account was smallor they felt they were receiving poorservice from the plan administrator.If this is the case the plan should notbe transferred to an RRSP as doubletaxation would result, but rather to anon-registered investment.

If the individual is not a US citizen,US resident, or green card holderthan there will be non-resident with-holding taxes of up to 30% on thetransfer to an RRSP. There may beforeign tax credits available on theCanadian tax return to offset the USwithholding tax, but in order to fully

utilize the foreign tax credits the individual must have Canadian taxpayable in the year of transfer equiva-lent to the amount of the US with-holding tax. For this calculation theCanadian tax payable does not in-clude any income from the pensionapplied to the RRSP.

An age penalty of 10% will be appliedby the US to any individual who isunder the age of 59½ on the date ofthe transfer. This age penalty may berecoverable by the individual becauseof the foreign tax credit.

UK pension transfers

UK pensions can be transferred to financial institutions that are recognized by the UK pensionauthorities as “Qualified RecognisedOverseas Pension Schemes”(QROPS). Investors Group has anRSP plan, approved as a QROPS.Other conditions required for a transfer are that at least 75% of thetransferred funds will be used to provide income for life, the benefitscannot commence prior to age 55,and the UK taxation authorities areadvised when the individual starts to receive benefits.

The taxation issues of a UK pensiontransfer are not always clear due tothe fact that the Canada – UK taxtreaty does not comment on the non-resident withholding tax rate onlump sum transfers, although with-holding taxes on lump sum transfersto QROPS are not currently imposed.

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Pension payments from the UK thatare considered periodic are not sub-ject to non-resident withholdingtaxes. Therefore, the individualshould seek advice from the UK pension administrator regarding the withholding tax that would becharged before a transfer is initiated.

As long as the pension funds aretransferred to a QROPS there areusually no penalties associated with a UK pension transfer.

Summary

Foreign pension transfers are legiti-mate options in the right circum-stances, but individuals should consider all factors involved in thetransfer before taking any action. It is extremely important to attainindependent accounting advice andto contact the pension plan adminis-trator before initiating a transfer.Contact your Investors GroupConsultant for further information.

This report is intended as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, noris it intended to provide tax, legal or investment advice. Clients should discuss their situation with their Investors Group Consultant for advicebased on their specific circumstances.

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“Foreign Pension Transfers” ©2011 Investors Group Inc. (10/2011) MP1568