David Rotfleisch on How CRA Taxes UK Pension Plan Transfers to a SIPP: Insights from a Canadian Tax Lawyer

In November 2022, the Canada Revenue Agency (CRA) considered questions about the Canadian income tax treatment of a Canadian resident transferring the commuted value of benefits from a UK defined-benefit pension plan (a “UK DB Plan”) to a self-invested personal pension (a “UK SIPP”).

The key issues were whether the transfer gives rise to taxable income under paragraph 56(1)(a) of the Income Tax Act (the “ITA”), including through constructive receipt or subsection 56(2), and whether the transfer is treated as a “contribution” to a non-resident trust for the purposes of subsection 94(1) of the ITA.

Case Overview: A Canadian Taxpayer’s UK Pension Transfer to a SIPP

A UK resident became a member of a UK defined-benefit pension plan (“UK DB Plan”) through his employment in the United Kingdom, with all entitlements linked to services performed while resident and employed in the UK. Employer contributions were made only during periods of UK residence; no contributions were made while the individual was a non-resident.

After moving to Canada, he or she established a UK self-invested personal pension (“UK SIPP”), organized as a trust under UK law, where he or she is the sole beneficiary. Prior to reaching age 55, that individual instructed a direct transfer of the commuted value (“Commuted Value”) from the UK DB Plan to the UK SIPP.

Under UK pension legislation, investment growth within a SIPP is generally tax-sheltered until amounts are withdrawn, and access to funds is typically restricted until age 55. Transfers from a defined-benefit plan to a SIPP must be approved by the plan trustees and accompanied by independent financial advice to ensure the transfer is in the member’s best interests.

Pension Benefits Taxable Under Paragraph 56(1)(a) of the Income Tax Act

The CRA noted that its statements are intended as general guidance and do not constitute legally binding advice, except when provided through an advance income tax ruling.

Under subparagraph 56(1)(a)(i) of the Income Tax Act, taxpayers must report as income any pension benefits received during the year, including benefits from foreign pension plans that relate to services performed while the individual was a non-resident of Canada.

A key question is whether a direct transfer between plan administrators counts as “receipt” of a pension benefit. Under the doctrine of constructive receipt, any amounts made available to a taxpayer—either credited for their benefit or set aside without restriction—are considered received for tax purposes, even if the funds are never physically in the taxpayer’s hands.

The CRA determined that the individual is treated as having constructively received the Commuted Value at the time it is transferred to the SIPP. Even though the funds never physically reach the taxpayer, the transfer effectively sets the amounts aside for the individual’s benefit, meeting the criteria for constructive receipt. Consequently, the Commuted Value must be reported as income in the year of the transfer under subparagraph 56(1)(a)(i) of the ITA.

The CRA further noted that, even if the doctrine of constructive receipt did not apply, subsection 56(2) would yield the same outcome. This rule applies when a taxpayer directs an amount that would otherwise be taxable to be paid to a third party. A transfer from a foreign pension plan to a SIPP, made at the taxpayer’s instruction, falls squarely within this provision.

Additionally, the CRA confirmed that neither the ITA’s tax-deferred rollover rules nor the Canada-UK Tax Convention offers relief for transfers between foreign pension plans.

Transfer Classification: “Contribution” Status Under Subsection 94(1)

Subsection 94(1) of the ITA addresses contributions to non-resident trusts and is relevant for determining the Canadian tax treatment of such transfers.

According to the CRA, in both situations considered—whether the individual had personally contributed to the UK DB Plan while resident in the UK, or whether contributions were made solely by the employer—the Commuted Value, once deemed received by the individual, is treated as a transfer to the UK SIPP. This transfer qualifies as a “contribution” under paragraph (a) of the definition in subsection 94(1) of the ITA.

The CRA did not address any further tax implications for the SIPP trust itself, as that was beyond the scope of the inquiry.

Tax Pro Tips – Careful Planning Needed When Transferring a Foreign Pension

The concept of constructive receipt treats an amount as received for tax purposes once it is made available to a taxpayer without significant restrictions, even if the funds are not physically withdrawn. This means that a taxpayer may be considered to have received the full pension amount even when transferring funds directly from one pension plan to another, without taking any cash.

To mitigate such potential tax consequences, it is strongly advised that taxpayers seek guidance from an experienced Canadian tax lawyer to carefully review and plan all available options.

Frequently Asked Questions (FAQs)

What does the doctrine of constructive receipt mean?

Constructive receipt is a tax principle used to determine when a taxpayer is considered to have received an amount, even if it has not been physically paid in cash or property. In Canadian tax law, this concept is particularly important for employment income, as it helps establish the timing for including income for tax purposes.

Are foreign pensions subject to taxation in Canada?

Yes. Under subparagraph 56(1)(a)(i) of the Income Tax Act (ITA), taxpayers must include in their income any foreign pension benefits received that relate to services performed while they were non-residents of Canada.

Disclaimer: This article is intended for general informational purposes only and reflects the law as of the date of posting. It has not been updated and may no longer be current. The content does not constitute legal advice and should not be relied upon as such. Each tax situation is unique and may differ from the examples discussed. You should consult a qualified Canadian tax lawyer for advice tailored to your circumstances.