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Canadian and UK flag

Residents of Canada that hold UK pensions can no longer transfer those pensions to any Canadian pension as HMRC considers all Canadian pension schemes incompatible with UK regulations.

Now is a good time to consider a transfer of frozen UK pensions because the transfer values of Defined Benefit (Final Salary) Pensions are still unusually high. This is because transfer values are based on Gilts and the significant drop in Gilt yields after Brexit has forced transfer values to all-time highs.

I'd like to understand the benefits

Benefits of Transferring To A Personal Pension

Many Canadian residents see the considerable benefits of transfer from frozen UK company pensions to new, more flexible, UK Personal Pensions.

These benefits include:

  • A Personal Pension is an Approved Scheme under the HMRC Rules
  • No tax charge or tax penalty for UK transfers
  • Security of Investment with UK approved Trustees
  • The FULL capital value of the fund can be passed to your spouse on death
  • The FULL capital value of the fund can be left as an inheritance, free of UK Inheritance Tax, to children/chosen beneficiaries
  • You have full control over investment, currency and income decisions
  • You can access 25% of the fund as a Pension Lump Sum at age 55, if required
  • Income withdrawals can be taken from age 55 WITHOUT any reduction of income due to early retirement.
  • The capital remains an asset of the holder – thereby ensuring YOU direct monies to your chosen beneficiaries, in full.
  • Flexibility of drawdown options including full withdrawal of fund at retirement
  • Amalgamation/consolidation of schemes
  • Total compatibility with UK rules should you return to the UK!

The good news is that you CAN transfer your UK company pensions to a UK recognised and approved alternative that IS suitable for Canadian residents, without any tax penalty.

Canada Tax Position


Residency

An individual is considered a tax resident of Canada if he or she resides in Canada or is ordinarily resident in Canada. This is determined by the individual establishing residential ties with Canada such as a property/dwelling, the location and residency of your spouse (or common-law partner) and dependants.

A non-resident individual will be deemed to have been resident in Canada if they spend at least 183 days in Canada in a calendar year.


Taxation Basis

Individuals resident in Canada are taxed at the federal and provincial levels on their worldwide income and capital gains. Federal tax rates are progressive up to 33%. Territorial rates are also progressive with typical bandings of 5-20% (25.75% in Quebec).

Non-residents are taxed on Canadian-source income (generally employment and business income) and on gains from the disposal of taxable Canadian property.

Where an individual is found to be a resident of both Canada and another country, the DTA with that other country will determine the individual’s residency and the country which has the primary right to tax the individual.


Canada Adventure

Taxation of Pension Income

Taxable income includes pension income. Canadian residents are required to include in their income any and all amounts received as a “superannuation or pension benefit”. There is only one exception, which is where the pension payments are received on death or disability arising out of a war from a country that is an ally of Canada.

Foreign Pension Arrangements

In general, benefits received when a resident of Canada from a foreign pension plan, that are attributable to employment while the individual was not a resident of Canada, will be included in your total income as ‘superannuation’ or pension income.

Caution is required to ensure that the foreign pension plan does not fall under the Retirement Compensation Arrangement rules which imposes a 50% withholding tax regime (this only potentially applies to occupational arrangements), but you should check this aspect.

Payments received from a foreign personal pension scheme will generally be taxed as:

  • a superannuation or pension benefit where the payment represents a benefit for a period of employment while the person was not resident in Canada; or
  • employment income where the payment represents a benefit for a period of employment while the person was resident in Canada.

It may be possible to benefit from annuity taxation, where the scheme purchases an annuity, treated for tax purposes as part interest income and part return of capital.

A lump-sum payment from a foreign pension plan will be taxed at graduated rates in Canada. There are no provisions to exempt pension commencement lump-sum payments from taxation. Non-residents of Canada are not taxed in Canada on foreign pension income even if that income is remitted to Canada.


Foreign Tax Credit

A foreign tax credit may be claimed on the Canadian tax return by a Canadian resident for tax paid in respect of the foreign pension to the foreign jurisdiction in accordance with the DTA.


UK Tax on Payment of Pension Death Benefits

From 6 April 2015, the UK tax treatment of benefits from Person Pension schemes on death depends, amongst other things, on the age of the member at the time of death i.e. if the individual is pre or post age 75.


UK/Canada DTA

There is a DTA between the UK and Canada. Under this, periodic pension payments arising in the UK and paid to a resident of Canada are taxable only in Canada.

There are separate rules for annuities. Annuities arising in the UK and paid to a resident of Canada may be taxed in Canada but may also be taxed in the UK. However, if the recipient is the beneficial owner, the tax charged shall not exceed 10% of the portion of the annuity subject to tax.

Non-periodic and lump-sum payments are not specifically covered by the DTA.

Tax Position of Transfer to a QROPS

The UK regulations implemented from 9th March 2017 covering transfer of UK pensions outside of the EEA would impose a 25% tax penalty for transfers to QROPS/ROPS for residents of Canada.


Canada Adventure

Existing QROPS for Canadian Residents

If you transferred UK pensions to a QROPS before the 9th March 2017 your tax position will rely upon the jurisdiction where the pension is held. The choices are most commonly Gibraltar and Malta.

GIBRALTAR has no DTA with Canada. The QROPS pension payments to you would therefore be taxable in Gibraltar at a standard rate of 2.5%. This is not recoverable.

There is no UK income tax if you are non-UK resident (for at least 5 full tax years irrespective of the amount, or less than 5 years with total withdrawals in the non-resident period below £100,000). There is no Gibraltar Inheritance Tax. You have protection from UK IHT. There should be no LifeTime Allowance concerns as the transfer was measured against the LTA upon transfer to QROPS.

Protection from UK death benefit charges, if non-UK resident (and non-UK resident for last 5 tax years before payment).

MALTA does have a DTA with Canada. This provides that pensions and annuities arising in Malta and paid to a resident of Canada may be taxed in Canada.

There is no UK income tax if you are non-UK resident (for at least 5 full tax years irrespective of the amount, or less than 5 years with total withdrawals in the non-resident period below £100,000).

There should be no LifeTime Allowance concerns as the transfer was measured against the LTA upon transfer to QROPS.

There is no Maltese Inheritance Tax. You have protection from UK IHT.

Protection from UK death benefit charges, if non-UK resident (and non-UK resident for last 5 tax years before payment).


Other Taxes and DTAs

Canada has no formal gift or inheritance tax. However, a person who makes a gift, during their lifetime or upon death, may be subject to tax.

Where a pension arrangement provides for the periodic pension payments to continue for the benefit of the surviving spouse, there would generally be no deemed disposition on the deceased’s death. In some situations, certain steps or designations may be required to ensure the appropriate rollover to the surviving spouse.

Net wealth and net worth taxes are generally not imposed in Canada.

Canada has currently concluded over 100 DTAs, including the ones with the UK and Malta.

The information contained in this Site is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The author is not giving direct legal or tax advice and the information contained on the site should not be acted upon without seeking professional advice.

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