David Rotfleisch on How the CRA Handles Foreign Pension Plans & Pension Income in Canada – Inside Scoop from a Tax Lawyer

Introduction: Foreign Pension Plans and Income Face Complex, Fact-Specific Tax Treatment in Canada
The 2021 Canadian Census reported that nearly one-quarter of Canada’s population was made up of immigrants, ranking the country as home to the eighth-largest immigrant population worldwide. In 2022 alone, Canada’s population increased by a record 1.1 million people, the majority of whom were permanent and temporary immigrants. Many newcomers arrive with years of prior work experience outside Canada and are already participants in non-Canadian or foreign pension plans.

For Canadian tax residents, the tax and reporting rules surrounding foreign pension plans are especially complex. Unlike Canadian pension plans, which are addressed through multiple provisions in the Income Tax Act (the “Tax Act”), there is no single, comprehensive set of rules that governs foreign pension plans.

To complicate matters further, the Tax Act does not define the term “pension,” leaving its interpretation to common-law principles. In some cases, the treatment of pensions and pension income is instead dictated by a bilateral tax treaty between Canada and another country, which can take precedence over domestic tax legislation. As a result, taxpayers with foreign pension participation often struggle to understand the Canadian tax implications of both contributing to and receiving income from such plans.

This article provides a general overview of how foreign pension plans are treated under Canadian tax law. However, given the complexity of these rules, it does not offer a complete or tailored analysis. For guidance specific to your situation, it is strongly recommended that you seek advice from one of our experienced Canadian tax lawyers.

The Term “Pension” Isn’t Defined in Canadian Tax Law: How Should It Be Interpreted?
The Income Tax Act (the “Tax Act”) does not expressly define the term “pension,” though it does provide definitions and context for several related terms. For instance, the Tax Act includes definitions for:

■      “Pension Income” as defined in subsection 60.03(1);

■      “Pooled Pension Plan” as defined in subsection 147.5(1); and

■      “Registered Pension Plan,” “Retirement Compensation Arrangement,” “Salary Deferral Arrangement,” and “Superannuation or Pension Benefits” as defined in subsection 248(1).

These terms, while closely tied to the idea of a pension, form the framework for how various retirement-related compensation arrangements are taxed. However, they do not establish a single, comprehensive definition of what qualifies as a “pension” under the Tax Act. In practice, the meaning of “pension” in Canadian tax law is largely shaped by case law and by how the term is commonly understood in different contexts.

In general, a pension is viewed as income received after retirement, funded by an employer, an employee, both parties together, or by a government. Pension income derived entirely from a government plan is usually treated as pension income in Canada, though this treatment can be affected by the provisions of an applicable bilateral tax treaty or other agreements between that government and Canada.

When a pension is funded by employers and/or employees, it is often governed by a formal plan outlining its terms and conditions. In the case of foreign pension plans, Canadian courts have historically considered several factors in determining whether such a plan qualifies as a pension under Canadian tax law, including:

■      Whether the plan provides retirement income through periodic payments or lump-sum distributions;

■      Whether contributions are made by the employer, the employee, or both;

■      Whether contributions occur during the employee’s working years and/or after retirement;

■      Whether participation in the plan is a condition of employment in the employer’s jurisdiction;

■      Whether the plan is designed to deliver retirement benefits for the lifetime of the recipient; and

■      Whether the plan has been designed primarily for tax planning purposes.

Accordingly, when assessing whether a foreign arrangement related to employment or retirement meets the definition of a pension in Canada, it is essential for a knowledgeable Canadian tax lawyer to carefully evaluate every aspect of the arrangement.

Employment Arrangement or Personal Trust: Tax Treatment Goes Beyond the Definition of Pension
Canadian courts and the Canada Revenue Agency (CRA) have repeatedly stressed that, for tax purposes, the definition of a “pension” is determined by the substance of the arrangement rather than its form. A central factor in this determination is whether the foreign plan originates from an employment relationship.

In numerous tax cases, the courts have found that a retirement plan qualifies as a “pension” if it is created or maintained by an employer to provide retirement benefits to employees as part of their overall compensation. This includes situations where contributions are made by the employer, the employee, or both, and where the entitlement to benefits arises directly from the employment arrangement.

Conversely, foreign plans that grant individuals wide discretion over contributions, investments, and withdrawals—particularly those not tied to employment—may not be recognized as pension plans. Instead, the CRA may classify these as personal trusts or foreign investment accounts, leading to different tax consequences and additional reporting requirements, such as filing Forms T1135 or T1141.

That said, the mere classification of a foreign arrangement as a “pension” does not entirely dictate its tax treatment. Pensions may also function as a vehicle for deferring tax on employment income. The following section outlines two common types of foreign arrangements and analyzes their tax implications in Canada.

Salary Deferral Arrangement and Retirement Compensation Arrangement Explained
A Salary Deferral Arrangement (SDA) is defined in subsection 248(1) of the Income Tax Act as:

“a plan or arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under this Act by the taxpayer in respect of […] salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year […].”

If a foreign plan is classified as an SDA, any deferred amounts may be considered immediately taxable in Canada, even if the taxpayer has not yet received the funds. This can result in unexpected and often significant tax liabilities, particularly for foreign arrangements that allow voluntary deferral of compensation.

A Retirement Compensation Arrangement (RCA) is also defined under subsection 248(1) of the Tax Act as:

“a plan or arrangement under which contributions (other than payments made to acquire an interest in a life insurance policy) are made by an employer or former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm’s length, to another person or partnership […] in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the service rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer […].”

The Act also specifies certain exclusions from the definition of an RCA, such as employee trusts, registered pension plans, and disability or income maintenance insurance plans offered through an insurance company.

Unlike contributions to registered pension plans, contributions to an RCA are subject to a refundable tax of 50% at the time of contribution, with partial refunds issued as benefits are eventually paid out. Although RCAs are less commonly applied to foreign pension arrangements, they may apply where a non-registered or employer-sponsored arrangement is designed to provide retirement benefits outside the scope of conventional pension rules. This classification subjects the arrangement to a unique and complex tax regime.

Bilateral Tax Treaties vs. Common Law and CRA Policies: Which Prevails?
Regardless of common-law principles or CRA administrative policies governing the taxation of foreign pension plans, the provisions of a bilateral tax treaty take precedence. For instance, Article XVIII of the Canada–U.S. Tax Treaty provides that pensions and annuities originating in the United States of America and paid to a Canadian tax resident are generally taxable in Canada.

However, if the pension were not included in taxable income in the United States of America if the individual were a tax resident there, then that same pension is also exempt from taxation in Canada. The Canada-U.S. Tax Treaty also outlines specific rules for pensions, annuities, and benefits provided under each country’s social security system.

Accordingly, the tax treatment of a U.S. pension or annuity must first be analyzed under the bilateral treaty. Where the treaty does not provide clear guidance, Canadian common-law principles are applied to determine how the pension or annuity will be taxed.

For this reason, it is essential for taxpayers to understand the applicable bilateral treaty provisions that govern the taxation of foreign pension plans and related arrangements in Canada.

Tax Pro Tips – Foreign Pension Plans and Unintended Tax Implications in Canada
Unintended tax consequences can arise in Canada even before a Canadian tax resident begins receiving payments from a foreign arrangement or pension plan. Once income is received, it generally must be reported on the Canadian tax return, even if it is not taxable in the source country—for example, certain United Kingdom pensions. In addition, taxpayers may also be required to file supplemental forms, such as T1135, to disclose their interest in a foreign arrangement.

If you are concerned that you may not have fully complied with Canadian tax obligations relating to foreign pension plans or foreign pension income, it is important to seek legal guidance. Our experienced Canadian tax lawyers can assess your situation, explore possible remedies, and assist with a Voluntary Disclosure Program application to address past non-compliance while minimizing potential penalties.

Frequently Asked Questions (FAQs)
Do I Have to Pay Canadian Taxes on My Foreign Pension Income?
As a Canadian tax resident, you are generally required to pay tax on your worldwide income, which includes income from foreign pensions or retirement arrangements. This means that both periodic payments and lump-sum withdrawals from foreign pension plans are usually taxable in Canada at your marginal tax rate. The exact treatment depends on whether the payment is categorized as pension income, a retiring allowance, or another type of income under Canadian tax law.

That said, relief may be available to avoid double taxation. You could qualify for a foreign tax credit or benefit from provisions in a tax treaty between Canada and the country where your pension originated. In many cases, treaties allow Canada to tax the income while also granting a credit for foreign taxes already paid.

Regardless, it is essential to accurately report your foreign pension income on your Canadian tax return, and in some cases, you may also need to file additional disclosure forms.

Which Foreign Arrangements Qualify as Pension Plans in Canada?
In Canada, a foreign arrangement will generally be treated as a pension plan if its primary purpose is to provide retirement or superannuation benefits connected to employment. These types of plans often include contributions made by the employer, the employee, or both, with benefits becoming payable upon retirement, disability, or death.

However, not every retirement-related account outside Canada meets this definition. Personal savings accounts, investment vehicles, or insurance-based products may fall outside the pension category for Canadian tax purposes, particularly where they allow broad access to funds or are not tied to employment.

The classification ultimately depends on the specific features of the arrangement, Canadian tax rules, and any relevant tax treaties. If you need clarity on how your foreign arrangements are treated in Canada, our experienced Canadian tax lawyers can provide guidance.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.

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