Pension Taxation: Austrian-Canadian Tax Treaty Explained

If you have lived or worked in both Austria and Canada, you may be eligible for pensions or benefits from either country or both. The Agreement on Social Security between Canada and Austria came into force on November 1, 1987, with a supplementary agreement coming into force on December 1, 1996. This agreement was replaced with a revised agreement that came into force on July 1, 2023.

Pension benefits received from outside of Canada are regarded as taxable income in Canada and must be reported in Canadian dollars on line 11500 of the recipient's T1 return. However, if the foreign pension income is taxable in its home country, a double taxation problem arises when it is taxed again in Canada. Fortunately, there are several methods to mitigate the effect of double taxation.

How to report Austrian pension income on your tax return

If you have lived or worked in both Austria and Canada, you may be eligible for pensions or benefits from either country or both. The Agreement on Social Security between Canada and Austria came into force on 1 November 1987, with a revised agreement coming into force on 1 July 2023. This agreement may help you qualify for benefits from either country or both.

In Canada, you are taxed on your worldwide income, which includes foreign pension income. This means that your Austrian pension income is generally taxable in Canada when received. When reporting your Austrian pension income on your tax return, you should report it in Canadian dollars on line 11500 of your T1 return. If you receive the payments as a lump sum, you must use the exchange rate for Austria vs the Canadian exchange rate for the day the money goes into your account. If you receive the pension periodically, you should use an average exchange rate for the period that you received the payments.

If your Austrian pension income has already been taxed in Austria, you may face double taxation when you also file your Canadian income taxes. However, there are several methods to mitigate the effect of double taxation. For example, there may be tax treaties in place that deem all or part of your pension income as non-taxable. If this is the case, you can claim a deduction for the amount on line 25600 of your tax return. If there is no such treaty, you may still reduce your tax burden by claiming foreign tax credits on the amount of tax you already paid for the pension income in Austria. To do this, you need to fill out form T2209 Federal Foreign Tax Credit to calculate the credits and report the amount on line 40500 of your income tax return.

How to avoid double taxation

If you are a Canadian resident or company earning income outside of Canada, double taxation is a concern. This form of taxation can impact your yearly profits, but it is often avoidable.

Double taxation is when you pay income taxes twice on the same source of income. This issue usually arises when an individual or corporation engages in business outside of their country of residence. For example, a Canadian resident who teaches English in China or an American marketing firm that hires Canadian freelance writers.

Canada's Tax Treaties

Canada has tax treaties with many foreign countries, including Austria and the United States, to prevent double taxation. These agreements outline reductions and exemptions for Canadians engaged in business dealings abroad. While you may still need to pay a certain amount of taxes to the foreign country, having a Canadian tax treaty in place generally reduces the amount owed.

• Consult a Canadian Tax Lawyer: They can review the specific provisions of the tax treaty between Canada and the foreign country. If your pension income is exempted, you can claim a deduction for the amount on your tax return.
• Claim Foreign Tax Credits: If the treaty doesn't contain exemption provisions, you may reduce your tax burden by claiming foreign tax credits on the amount of tax already paid for the pension income in the foreign country. For this, you need to fill out form T2209 Federal Foreign Tax Credit to calculate the credits and report the amount on line 40500 of your income tax return.
• Contact the Canadian Competent Authority (CCA): The CCA is a part of the Canada Revenue Agency (CRA) and offers free services to businesses with questions about international tax treaties. They also help resolve disputes related to tax treaties and provide consistency between advanced pricing arrangements and the Income Tax Act through the Mutual Agreement Procedure (MAP).
• Utilise the Small Business APA Program: This program lets taxpayers and the CRA work together to determine how much you pay in taxes to each country, so you don't pay twice.
• Fill Out the W-8BEN Form: If you are an individual or small business earning income in the United States, you can be exempted from paying income taxes to the IRS by filling out this form and submitting it to America's Internal Revenue Service (IRS). Instead, you pay the Canada Revenue Agency (CRA) for income tax owed on revenue earned in the US.

The Agreement on Social Security between Canada and Austria

The agreement applies to any person who is or has been subject to the legislation of Canada or Austria, or both countries. It also applies to any other person who derives eligibility for a benefit from that first person under the legislation of either country.

Under the agreement, a person who has lived or worked in both Canada and Austria may be eligible for pensions or benefits from either country, or both. The benefit paid by each country will be based on the individual's creditable periods under that country's pension program.

The Canadian pension programs included in the agreement are the Canada Pension Plan (CPP) and the Old Age Security (OAS) program. The Austrian pension program consists of Pension Insurance for Wage Earners, Pension Insurance for Salaried Employees, Austrian Mining Industry Insurance, Austrian Railways Insurance, Social Insurance for Trade and Industry, and Social Insurance for Farmers.

To qualify for a benefit under the Austrian pension program, an individual must normally have periods of coverage under the program for a minimum number of months. If an individual has not contributed to the Austrian pension program for the minimum period, Austria will consider periods of contribution to the Canada Pension Plan and periods of residence in Canada after the age of 18 as periods of coverage under its pension program.

The agreement also includes provisions for equality of treatment, export of benefits, coverage and residence under the legislation of Canada, and the determination of eligibility for benefits.

The agreement can be terminated by either country with 12 months' written notice through diplomatic channels.

The process of transferring foreign pension income to a Canadian RRSP

Step 1: Check if the benefit qualifies as a pension

According to paragraph 60(j) of the Canadian Income Tax Act (ITA), foreign retirement savings can be divided into two types: pension benefits and foreign retirement arrangements. To contribute a foreign pension benefit to an RRSP without using any contribution room, the following requirements must be met:

• The payment from the plan must be a lump-sum amount.
• The payment must relate to services rendered by you, your spouse, or your former spouse during the period in which you were a non-resident of Canada.
• The payment must be fully taxable in Canada and included in your income in the year of transfer.
• The amount transferred must be designated as a transfer on Schedule 7 of your Canadian income tax return in the year of transfer to obtain an offsetting deduction from the income inclusion.

Step 2: Check foreign rules regarding pension transfers

Some countries have their own rules and restrictions regarding pension transfers. It is important to review the regulations of the country where your pension is held before initiating the transfer process. Failure to comply with the home country's rules may result in punitive tax penalties. Additionally, there may be fees associated with the withdrawal of the foreign pension benefit or transfer-related costs that should be confirmed in advance.

Step 3: Review tax treaties

The final requirement for foreign pension transfers under the ITA is that the foreign pension benefit be included as income for Canadian tax purposes. If there is a tax treaty in place between Canada and the country where your pension is held, it may allow for the foreign benefit to be exempt from Canadian tax. In this case, you can claim a deduction on your Canadian tax return to offset the income inclusion. However, if you claim this deduction, you cannot also claim the deduction for the foreign pension transfer to your RRSP, and it would require contribution room.

Step 4: Understand the process and eligibility

To transfer your foreign pension to a Canadian RRSP, you must be a Canadian resident for tax purposes. Even if you are a citizen, that does not always mean you are a resident for tax purposes. Additionally, the conditions of your pension plan may prevent you from transferring your funds to Canada until you reach a certain age, as is the case with some UK pension plans. It is important to consult with an expert to determine your eligibility and understand the specific rules and regulations that apply to your situation.

Step 5: Consult with a tax advisor

The tax implications of transferring foreign-sourced income to Canada

When it comes to transferring foreign-sourced income to Canada, there are several tax implications to consider. Firstly, as a Canadian resident, you are subject to tax on your worldwide income, which includes any foreign pension or retirement plan withdrawals. This means that even if your foreign pension is not taxable in the country paying the pension, it may still be taxable in Canada, potentially resulting in double taxation.

To avoid double taxation, Canada has entered into tax treaties with other countries, including Austria and the United States. These treaties outline specific rules and agreements that may deem all or part of your foreign pension or retirement plan income as non-taxable in Canada. Therefore, it is essential to consult with a Canadian tax lawyer or advisor to review the specific provisions of the relevant tax treaty.

If the treaty does not contain exemption provisions, you may still reduce your tax burden by claiming foreign tax credits on the amount of tax already paid on your foreign pension or retirement plan income. This can be done by filling out the appropriate forms, such as Form T2209 Federal Foreign Tax Credit in Canada, to calculate the credits and report them on your income tax return.

When transferring a foreign retirement plan to Canada, there are specific conditions that must be met to defer taxation on the transfer. These conditions include:

• The withdrawal from the foreign retirement plan must be received as a lump-sum payment.
• The contributions to the foreign retirement plan must be attributable to services rendered by you or your spouse during a period when you were not a resident of Canada.
• You must be a resident of Canada at the time of the contribution to your Registered Retirement Savings Plan (RRSP).
• The contribution to your RRSP must be made by December 31 of the calendar year you turn 71.
• The withdrawal from the foreign retirement plan must be included in your Canadian income tax return and not be exempt from income tax in Canada due to a tax treaty or other agreement.

It is important to note that the foreign jurisdiction may have income tax filing requirements for your withdrawal, and you must consult with a tax advisor to determine these requirements. Additionally, the foreign country may impose restrictions on withdrawing pension benefits, and it is recommended to verify any restrictions with the administrator of your foreign retirement plan.

When transferring money from Canada to another country, such as the United States, there are also tax implications to consider. Foreign exchange gains and losses can significantly impact the value of your funds, and while Canada typically doesn't tax these gains, the US may apply taxes depending on the type and scale of the transaction. Consulting a tax professional experienced in international transactions is advisable to navigate the potential tax consequences.

Both Canada and the US have established reporting obligations for individuals and businesses engaged in international financial transactions. These requirements include reporting foreign income, foreign property, foreign investments, and foreign bank accounts. Non-compliance with these reporting obligations can lead to penalties and legal consequences, including financial fines, interest on unpaid taxes, and, in severe cases, criminal charges related to tax evasion.

In summary, transferring foreign-sourced income to Canada can have complex tax implications, and it is essential to seek professional guidance from tax advisors or lawyers experienced in cross-border financial transactions and international taxation. They can help you navigate the specific rules and treaties, claim applicable tax credits, and ensure compliance with reporting obligations to minimize your overall tax liability.

Frequently asked questions