Further to your request noted below, we have conducted a considerable amount of research regarding the taxability of a lump sum amount received at the commencement of a UK pension plan, and also requested an opinion from the IT Rulings Directorate (“ITRD”) of the CRA. Our conclusion is necessarily a bit technical so we have reproduced the relevant portions of the Income Tax Act below, and also a few paragraphs from the material provided to us by the ITRD. We are providing our complete conclusion since we are aware that there are a number of other taxpayers in similar situations that you may be in contact with now or in the future.

The relevant fact set as we understand it, and as we summarized for the ITRD is:

A taxpayer immigrated from the UK to Canada. Sometime after becoming resident in Canada, the taxpayer retired and began to draw on a private UK pension. Under UK law, up to 25% of a pension may be withdrawn upon retirement on a tax-free basis, so the taxpayer opted to do so. Is this amount taxable in Canada?

The letter you provided to us states:

“A review of the facts and documents submitted indicates that, regarding the lump sum pension amount, the letter you submitted from the British Transport Police dated May 11, 2017, indicates that 25% of the total crystallisation amount can be taken as a tax-free lump sum. Sub-clause 56(1)(a)(i)(C.1) of the Income Tax Act indicates that any foreign pension amount that would not be subject to income tax in the country of origin will not be subject to income tax in Canada.”

That is not what the referenced sub-clause actually says; it states:

“Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year, any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a superannuation of pension benefit including, without limiting the generality of the foregoing, the amount of any payment out of or under a foreign retirement arrangement established under the laws of a country, except to the extent that the amount would not, if the taxpayer were resident in the country, be subject to income taxation in the country.”

The key difference is that the portion of this clause which exempts certain receipts from taxation refers not to a “pension”, but a “foreign retirement arrangement”. Unlike the term “pension”, which is not defined in the Income Tax Act, the term “foreign retirement arrangement” is assigned a specific meaning. In Regulation 248(1) it states:

“Foreign retirement arrangement means a prescribed plan or arrangement.”

This is not very helpful, so one must look to regulation 6803 for further guidance:

“For purposes of the definition “foreign retirement arrangement” in subsection 248(1) of the Act, a prescribed plan or arrangement is a plan or arrangement to which subsection 408(a), (b) or (h) of the United States’ Internal Revenue Code of 1986, as amended from time to time, applies.”

Therefore, we conclude that the exempting provision in subsection 56(1)(a)(i)(C.1) applies only to certain US plans and no others, meaning that any amounts received from a UK pension plan are fully taxable.

When presented with the fact set above, the ITRD responded by sending us two responses that it sent to other taxpayers who had made related inquiries. The relevant paragraphs from the first response are:

“Canadian residents are generally required to include in their income all amounts received as a superannuation or pension benefit, pursuant to subparagraph 56(1)(a)(i) of the Act. A "superannuation or pension benefit" is defined to include any amount received, including any lump-sum payment, out of or under a superannuation or pension fund or plan. Subparagraph 56(1)(a)(i) of the Act also applies to benefits from a foreign pension plan unless the amount is exempted by the provisions of a tax treaty.

The Canada-U.K. Income Tax Convention (the "Treaty") does not prevent Canada from taxing pension receipts. Paragraph 1 of Article 17 of the Treaty provides that periodic pension payments arising in the UK and paid to a resident of Canada shall be taxable only in Canada. Paragraph 3 of Article 17 broadly defines the term "pension" to include any payment under a superannuation, pension or retirement plan, as well as any payment made under the social security legislation in the UK.”

This confirms that all amounts received from a UK pension plan are taxable. The relevant paragraph from the second response is:

“You made reference to clause 56(1)(a)(i)(C.1) of the Act and the definition of "foreign retirement arrangement" in subsection 248(1) of the Act. Please note that a "foreign retirement arrangement" is defined to mean a plan or arrangement as prescribed by the Income Tax Regulations (the "Regulations") and section 6803 of the Regulations presently only prescribes those plans or arrangements to which subsections 408(a), (b) or (h) of the United States Internal Revenue Code applies. Therefore, an arrangement or plan established under Hong Kong law is not a "foreign retirement arrangement" under the Act.”

This confirms that the exempting provision does not apply to non-US plans.

It appears that the recipient of the letter which you provided to us was simply lucky in achieving a tax result that is incorrect in law.