Reporting Foreign Pensions

Self-reported pension sources can include amounts received from foreign pension sources. Depending on the terms of the tax treaty between Canada and the country in question, some or all of that income may be deductible.

• German Social Security. Social security pensions from Germany are added into pension income on Line 115, and will qualify for the $2,000 Pension Income Amount and pension income splitting but, in addition, this income will qualify for a partially offsetting deduction on Line 256. What you qualify for can be complicated, however.

In the year that you begin to receive your social security pension from Germany, the exempt percentage is set. For those whose pension started in 2013, the exempt portion is 34% (you’ll pay tax on 66%). For 2012, the exempt portion was 36%. That same percentage applies to the pension received in the following year. For subsequent years, the exempt amount is the amount (in Euro) that was exempt in the second year of receipt (the first year you received pension for the entire year). All foreign income sources must be reported in Canadian funds so the amount received, as well as the exempt amount must be converted from Euro to Canadian dollars before reporting the income or claiming the deduction for the exempt portion.

As these pensions are only partially taxable in Canada, there may also be a requirement that you file a German tax return as well. Consult a tax professional regarding these filing obligations if you receive a social security pension from Germany.

• U.S. Social Security income is recorded in full at Line 115, but qualifies for a 15% deduction on Line 256 Other Deductions. (15% rate in effect from 1996 to date). For seniors who began receiving U.S. Social security before 1996, the deduction is 50% of the amount received. The taxable portion of U.S. Social Security is eligible for pension income splitting. Again report in Canadian funds.
   
• IRAs and Roth IRAs. Similar to our RRSPs, these plans are reported in Canada. So long as no contributions are made to a Roth IRA after 2008 while the taxpayer is resident in Canada, income from a Roth IRA will be considered as pension income in Canada if the taxpayer files an election that income earned within the Roth IRA is not taxable as it is earned. If the election is not made or contributions are made while the taxpayer is resident in Canada (after 2008), then the Roth IRA is treated like any other investment and earnings are taxable as foreign investment income. Distributions from a Roth IRA are not taxable. Income from an IRA (not a Roth IRA) is taxable when received if it would be taxable in the U.S. This means withdrawals are taxable except when transferred from one IRA to another.

Excerpted from Jacks on Tax. © Knowledge Bureau, Inc. All rights reserved.