BexB

Thanks Gemiran.

To summarise:

• I don't have any issue with the tax HMRC is deducting. If it has been too high initially, there has been a rebate.
• My understanding was that any UK tax paid could be offset $ for $ against the Canadian tax liability. The net effect would be that you paid the tax due on the total amount in Canada, albeit an initial amount to HMRC and then the balance to CRA.
• According to the CRA, this is not the case, there is a limit on the amount of UK tax you can offset against the Canadian tax due. The limit is 10% of the amount drawn. I am currently discussing with CRA whether this is 10% of the gross amount or 10% of the amount subject to UK tax (i.e. net of the 25% tax-free element); the CRA have assumed the latter, which seems unfair when I have been taxed in Canada on the gross amount.
• For amounts drawn of up to around GBP30,000 per year, I don't think this is an issue, since the 25% tax-free element and GBP11,500 personal allowance means UK tax of only GBP2,200 is paid, while the CRA will allow 10% x 75% x GBP30,000 = GBP2,250 to be relieved. The figure would be higher than GBP30,000 if CRA accepts they should allow relief on 10% of the full amount, rather than 75%.
• So if one ever wanted to draw a substantial amount for any reason, they may have to pay more tax than expected, since the UK tax will not be fully relieved in Canada.

BexB

gemiran

BexB,

I plan to start taking ad hoc payments from my UK pension pots in a couple of years time.
Probably one payment a year and not every year. I was investigating what my UK tax would be how I would go about getting a refund on an overpayment. The Canadian side of things seemed fairly straight forward, the payment is treated like an RRSP withdrawal. Info on the UK side was not easily available, and then I fell upon this thread where you're dealing with exactly the problem I'm trying to understand.
So that's the background to my 2 posts.

Basically I agree with point 3 of your reply, not with point 2. My experience is that point 2 is an ideal. You can get relief for foreign tax paid, but the rules don't necessarily totally cancel. (I have applied long ago for foreign tax relief in non pension areas).

The DT agreement is detailed here. Article 17 explains pensions.
https://www.fin.gc.ca/treaties-conventions/UK_-eng.asp

The CRA in your instance are treating your pension payment as an annuity which in my (layman) view is surprising as point 4 of article 17 states the definition of an annuity as a periodic payment while your payment is a one off. This possibly leads to an interesting situation. HMRC is treating your payment (correctly in my layman view) an not an annuity payment, but the CRA takes the opposing view.

Back to the CRA and tax relief. The CRA will give tax relief on money that has been double taxed.
The UK only charged tax on GBP 22500. There was no UK tax paid on the first 7500. The CRA is applying the tax relief correctly. 10% on the taxable GBP 22500 converted to $. (I note you state it should be on the gross amount, so are you looking at a different DTT doc?)

My personal view is that you are actually doing well as I can see the CRA could have argued that since this payment is a one off ad hoc payment it's not an annuity and not subject to relief.

BexB, I will be in exactly your situation in a couple of years. So this info on the 10% tax relief is something I will now look into for myself. Although I was planning to take a sum each year where the taxable amount came under my UK personal allowance. No UK tax, so no need to apply for tax relief.

I have a question if you have time. Your first post stated you paid UK tax of GBP 3598 while you mention a rebate in your reply to me. Could you clarify what rebate you got as I'm confused what the exact UK tax was you ended up paying. Can you explain the process by which you got the rebate. Did you use R43? Or was it some other form? I will need to follow the rebate process you did myself in the near future.

Thanks

BexB

For the first payment received, the provider will probably deduct tax at the emergency (month 1) rate. This means that they will not reflect the appropriate tax-free personal allowance and you will pay too much tax. For regular payments, the subsequent ones can be adjusted appropriately. For a one-off payment, there would need to be a tax rebate. I think this happens automatically - certainly, I did not complete any form.

gemiran

Thanks BexB.
I'm a couple of years off, and I'm starting to contact the pension companies and determine what I am able to do. Maybe they will clarify for me. If not I'll just go to HMRC and ask them. Thanks.

llysmabley

I have a whole of life policy with the Prudential.
In the UK I was allowed to take 5% of the initial lump sum invested tax free every year.
In effect this meant that over 20 years I will have been repaid the initial lump sum.
On maturity ( death ) the capital gains of the "with profits " policy will be taxable.

Now I am resident in Canada I have written (twice) to CRA to ask if this annual 5% is subject to Canadian tax each year. NO REPLY !

Does anyone know the answer, perhaps from personal experience ?

To me, the 5% is not income but repayment of my initial lump sum, the taxable element being the capital gain on maturity.

My query was sent to CRA at Box9769, Station T, OTTAWA. Is this the correct office ?
Anybody care to comment.

gemiran

BexB,

Regarding your 2nd question of reducing Canadian tax.

Did you apply for the $2000 pension income tax credit? The UK lump sum seems to be eligible.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-314-pension-income-amount.html

Also depending on your circumstances you can split certain pension income with your spouse, form T1032. My reading is if you are eligible for the pension income tax credit, you are eligible to split the pension income.

Gemiran

BexB

No joy over the GBP2,000, but the pension split was accepted, which obviously helped.

Hurlabrick

Can't help you with the CRA bit, but as regards the UK, your understanding is not quite accurate. What you are talking about is a UK 'Investment Bond' (technically a single premium whole life plan with minimal insurance).

Note that in the UK it is 5% annual withdrawals TAX DEFERRED (i.e. NOT tax free - a mistake commonly made). The tax is deferred to 20 years if you carried on, you would then pay tax on the calculated gain during that period.

gemiran

Thanks again BexB. That's great news for me as that means I will be able to split my UK pension with my wife.
I was a bit confused by your GBP2000 comment though.If the CRA allowed the pension split, then aren't you and your spouse entitled to the $2000 pension income tax credit?

Thanks Gemiran

BexB

Sorry Gemiran, misunderstood your question. Yes, we were able to both split the pension and receive the $2,000 credit.

BexB