A personal pension is a great way to save for retirement. There are many benefits, including tax advantages, flexibility, and the ability to name a beneficiary. If you are considering transferring to a personal pension, here are some things you should know.
The good news is that you can transfer your UK company pensions to a UK-recognized and approved alternative suitable for Canadian residents without tax consequences.
Let’s discuss Canada’s Tax position.
Residency
A person is considered a Canadian tax resident if he or she resides in Canada or is ordinarily resident in Canada. The individual establishing residential ties with Canada, such as a property/dwelling, the location and residency of your spouse (or common-law partner), and dependants, determines this.
If a non-resident spends at least 183 days in Canada in a calendar year, they are considered a resident.
Basis of Taxation
Individuals living in Canada are taxed on their worldwide income and capital gains at both the federal and provincial levels. Federal tax rates are graduated up to 33%. Territorial rates are progressive as well, with typical bandings ranging from 5-20% (25.75% in Quebec).
Non-residents are taxed on income earned in Canada (generally employment and business income) as well as gains from the sale of taxable Canadian property.
If an individual is found to be a resident of both Canada and another country, the DTA between the two countries will determine the individual’s residency and which country has the primary right to tax the individual.
Pension Income Taxation
Pension income is taxable income. All amounts received as a “superannuation or pension benefit” must be included in the income of Canadian residents. There is only one exception, and that is when pension payments are received due to the death or disability of a Canadian ally in a war.
Arrangements for Foreign Pensions
Benefits received from a foreign pension plan while a resident of Canada that is attributable to employment while the individual was not a resident of Canada will generally be included in your total income as ‘superannuation’ or pension income.
It is necessary to exercise caution to ensure that the foreign pension plan does not fall under the Retirement Compensation Arrangement rules, which impose a 50% withholding tax regime (this only potentially applies to occupational arrangements), but you should check this aspect with a tax adviser.
Payments from a foreign personal pension scheme are generally taxed when:
- a superannuation or pension benefit representing a benefit for a period of employment while the person was not resident in Canada; or
- employment income representing a benefit for a period of employment while the person was resident in Canada.
It may be possible to benefit from annuity taxation if the scheme purchases an annuity that is taxed as part interest income and part capital return.
In Canada, a lump-sum payment from a foreign pension plan is taxed at graduated rates. There are no provisions in place to exempt pension commencement lump-sum payments from taxation. Foreign pension income is not taxed in Canada for non-residents, even if it is remitted to Canada.
Credit for Foreign Taxes
A Canadian resident may claim a foreign tax credit on their Canadian tax return for the tax paid to the foreign jurisdiction in accordance with the DTA.[/vc_column_text][vc_column_text]
UK Tax on Pension Death Benefit Payments
From 6 April 2015, the UK tax treatment of benefits from Person Pension schemes on death is based, among other things, on the member’s age at the time of death, i.e. whether the individual is under or over the age of 75.
DTA UK/Canada
A DTA exists between the United Kingdom and Canada. Periodic pension payments originating in the UK and paid to a Canadian resident are taxable only in Canada.
Annuities have their own set of rules. Annuities arising in the United Kingdom and paid to a Canadian resident may be taxed in both countries. However, if the recipient is the beneficial owner, the tax charged cannot exceed 10% of the taxable portion of the annuity.
The DTA expressly excludes non-periodic and lump-sum payments.
Transfer to a QROPS and Tax Position
The UK regulations covering the transfer of UK pensions outside the EEA, which went into effect on March 9, 2017, would impose a 25% tax penalty for transfers to QROPS/ROPS for Canadian residents.
QROPS That Are Currently Available to Canadian Residents
If you transferred UK pensions to a QROPS before March 9, 2017, your tax position will be determined by the jurisdiction in which the pension is held. The most common options are Gibraltar and Malta.
GIBRALTAR does not have a DTA with Canada. As a result, the QROPS pension payments to you would be taxable in Gibraltar at the standard rate of 2.5%. This is irreversible. Gibraltar has no inheritance tax. You are immune from UK IHT.
MALTA has a DTA with Canada. This provision states that pensions and annuities derived in Malta and paid to a Canadian resident may be taxed in Canada. There is no inheritance tax in Malta. You are immune from UK IHT.
DTAs and Other Taxes
There is no formal gift or inheritance tax in Canada. A person who makes a gift, either during their lifetime or at death, may be taxed.
There would be no deemed disposition on the death of the deceased if the pension arrangement provided for the periodic pension payments to continue for the benefit of the surviving spouse. Certain steps or designations may be required in some cases to ensure the appropriate rollover to the surviving spouse.
Net wealth and net worth taxes are not commonly levied in Canada. Canada has currently signed over 100 DTAs, including those with the United Kingdom and Malta.
A personal pension is a great way to save for retirement and there are many benefits, including tax advantages, flexibility, and the ability to name a beneficiary. If you are considering transferring to a personal pension, the good news is that you can transfer your UK company pensions to a UK-recognized and approved alternative that IS suitable for Canadian residents, without incurring any tax consequences. At SJB we can help find the perfect solution for you and answer any questions you may have about transferring your pension. Contact us today to learn more!
