Mar 28, 2025
Introduction: Canadian Tax Treatment of Foreign Pension Plans and Income from Foreign Pension Plans is Complex and Fact-Specific
The 2021 Canadian Census revealed that nearly a quarter of the Canadian population consisted of immigrants, which represents the eighth-largest immigrant population in the world. In 2022, Canada’s population grew by an unprecedented 1.1 million people, most of whom are permanent and temporary immigrants to Canada. Many immigrants arriving in Canada have already had years of working experience outside of Canada, and thus, are participating in non-Canadian or foreign pension plans.
The tax and reporting obligations for Canadian tax residents who participate in foreign pension plans are complex, since there is no single section or part of the Income Tax Act (Canada) nor single legislation that deals with foreign pension plans. As a matter of fact, even for pension plans in Canada, there are multiple provisions in the Income Tax Act (the “Tax Act”) concerning the relevant tax treatment.
Furthermore, the term “pension” is not defined in the Tax Act, the definition of which therefore relies on common-law principles. At times, the treatment of pension plans and pension income may be determined by the bilateral tax treaty between Canada and another country, which can override provisions in the Tax Act. Consequently, Canadian taxpayers who participate in foreign pension plans can often face great challenges in determining the tax consequences of participating in and receiving income from foreign pension plans.
This article aims to provide a basic review of the tax treatment of foreign pension plans in Canada. However, due to the complexity of the rules concerning foreign pension plans in Canada, this article is unable to provide a comprehensive overview or detailed advice specific to any specific foreign pension plans. If you require advice specific to your case, we highly recommend that you consult with one of our expert Canadian tax lawyers.
The Term “Pension” is Not Defined in the Income Tax Act (Canada): What is a “Pension”?
The Tax Act does not define the term “pension,” although the Tax Act does provide definitions and context for some terms that are relevant. For example, the Tax Act provides definitions for the following terms:
- Pension Income under subsection 60.03(1);
- Pooled Pension Plan under subsection 147.5(1); and
- Registered Pension Plan, Retirement Compensation Arrangement, Salary Deferral Arrangement, and Superannuation or Pension Benefits under subsection 248(1).
These terms, closely related to the concept of pension, set up the framework for how different retirement-related compensation arrangements are taxed. But these terms do not, in and of themselves, create a universal definition of what qualifies as a “pension” under the Tax Act. In practice, the meaning of “pension” under Canadian tax law is often derived from jurisprudence and the ordinary usage of the term in different contexts.
Generally speaking, a pension is understood to be a source of income received after retirement, which is funded by an employer, an employee, by both an employer and an employee, and by a government. Income from a pension plan funded entirely by a government, subject to the applicable bilateral tax treaty or other agreements between that government and Canada, is generally considered pension income in Canada.
There often exists a formal plan setting out the terms and conditions for the pension when a pension is funded by employers and/or employees. When it comes to a foreign pension plan, Canadian courts have historically looked at several factors when determining if such a plan qualifies as a pension in the context of Canadian tax law:
- Whether the plan provides periodic or lump sum payments after retirement;
- Whether contributions are made by employers, employees, or both;
- Whether contributions are made during the employee’s working years and/or after the employee’s working years;
- Whether the plan is a requirement of employment in the employer’s jurisdiction;
- Whether the plan is structured to provide lifetime benefits; and
- Whether the plan intends to serve any tax planning purposes.
As a result, when evaluating whether a foreign arrangement in relation to employment or retirement qualifies as a pension in Canada, a taxpayer’s knowledgeable Canadian tax lawyer must carefully analyze all aspects of the specific arrangement.
Employment Arrangement or Personal Trust: The Definition of Pension Does Not Determine Tax Treatment
Canadian courts and the Canada Revenue Agency (CRA) have consistently emphasized that the definition of a “pension” for tax purposes is based more on substance than form. One of the key considerations is whether the foreign plan arises out of an employment arrangement.
In various tax cases, courts have held that a retirement plan will be considered a “pension” if it is established or maintained by an employer to provide retirement benefits to an employee as part of their remuneration package. This includes plans where contributions are made by either or both the employer and employee, and where benefits are received as a right stemming from the employment relationship.
On the other hand, foreign arrangements that give individuals broad discretion over contributions, investment decisions, and withdrawals—particularly those not linked to an employment context—may not qualify as pension plans. Instead, the CRA may treat such arrangements as personal trusts or even foreign investment accounts, triggering different tax treatments and additional reporting obligations, such as the filing of T1135 or T1141.
However, the mere fact that a foreign arrangement qualifies as a “pension” does not in itself fully determine its tax treatment. Pensions can also be considered a tax planning tool to defer payment of taxes on employment income. The section below discusses the two common types of foreign arrangements and examines their tax treatment in Canada.
Salary Deferral Arrangement and Retirement Compensation Arrangement
A Salary Deferral Arrangement, or an SDA, is defined under 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 taxpayers for services rendered by the taxpayer in the year or a preceding taxation year […].”
If a foreign plan is determined to be an SDA, any deferred amounts may be immediately taxable in Canada, even if the taxpayer has not yet received the funds. This can lead to unexpected and significant tax liabilities, particularly for foreign plans that allow voluntary deferral of compensation.
A Retirement Compensation Arrangement (RCA) is also defined under subsection 248(1) of the Tax Act and means:
“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 definition further provides a list of arrangements that are excluded from being an RCA, such as an employee trust, a registered pension plan, and a disability or income maintenance insurance plan under a policy with an insurance corporation.
Contributions to an RCA, unlike contributions to registered pension plans, are subject to a refundable tax equal to 50% at the time of contribution, with that tax being partially refunded as benefits are paid out. While RCA classification is less common for foreign pension plans, it can apply where a non-registered or employer-sponsored arrangement is used to provide retirement benefits outside the scope of traditional pension rules. This classification imposes a distinct and complex tax regime.
Bilateral Tax Treaty Can Override Common-Law Principles and CRA Administrative Policies
Regardless of any applicable common-law principles and/or CRA administrative policies that govern the tax treatment of foreign pension plans, a bilateral tax treaty can override them by including specific provisions and clauses. For example, Article XVIII of the Canada–U.S. Tax Treaty stipulates that pensions and annuities arising in the United States of America and paid to a Canadian tax resident may be taxed in Canada.
However, when the amount of such pension would be excluded from taxable income in the United States of America if the individual were a tax resident in the United States of America, then the amount of such pension received by the individual would be exempt from taxation in Canada. The Canada-U.S. Tax Treaty goes on to discuss specific treatments of pensions and annuities, as well as the treatment of benefits under the social security legislation in each country.
As such, the tax treatment of a U.S. pension or annuity must first be determined under the bilateral tax treaty. When the treaty provides insufficient information to make a determination, then the common-law principles in Canada will be relied on to decide the tax treatment of a U.S. pension or annuity.
It is crucial, therefore, for a taxpayer to understand the applicable bilateral tax treaty that determines the tax treatment of a foreign pension plan or arrangement in Canada.
Pro Tips –Unintended Tax Consequences in Canada Concerning Foreign Pension Plans
There can be unintended tax consequences in Canada even before a Canadian tax resident starts receiving distribution or payment from a foreign arrangement or a foreign pension plan. When a Canadian tax resident starts receiving income from such plan or arrangement, the taxpayer also likely needs to report such income on the Canadian income tax return even though it may not be taxable in the source jurisdiction, as is the case, for example, with United Kingdom pensions. In some cases, the taxpayer may also need to file additional forms, such as T1135, to report the taxpayer’s interest in a foreign arrangement.
If you believe that you may not have fully complied with Canadian tax law concerning your foreign pension plans or foreign pension income, you should consult with one of our expert Canadian tax lawyers. You may be eligible to remedy your prior non-compliance by submitting a Voluntary Disclosure application. Our expert Canadian tax lawyers can provide legal advice on potential remedies, identify any areas of concern, and assist you with the Voluntary Disclosure application.
FAQ
Do I Need To Pay Taxes in Canada On My Foreign Pensions?
A Canadian tax resident is generally required to pay taxes in Canada on worldwide income, which will often include income from your foreign pension or arrangements. This means that periodic payments or lump-sum withdrawals from foreign pension plans are typically included in your income and taxed at your marginal tax rate. The specific tax treatment may vary depending on whether the payment is considered pension income, a retiring allowance, or another form of income under Canadian tax law.
However, you may be eligible for relief from double taxation through a foreign tax credit or a tax treaty between Canada and the country where the pension originated. Many treaties allow Canada to tax the pension income while also permitting a credit for foreign tax paid on that income.
Nevertheless, it’s important to properly report income from your foreign pension on your Canadian tax return. In some cases, you may also need to file additional information returns.
What Types of Foreign Arrangements Are Considered Pension Plans in Canada?
In Canada, a foreign arrangement is generally considered a pension plan if it is established primarily to provide retirement or superannuation benefits and is linked to employment. These plans typically involve contributions from an employer, an employee, or both, with benefits payable upon retirement, disability, or death.
However, not all foreign retirement-related accounts qualify. Personal savings plans, investment accounts, or insurance-based products may not be treated as pension plans for Canadian tax purposes, especially if they allow broad access to funds or are not employment-based.
Ultimately, the determination depends on the specific facts of the plan, relevant Canadian tax law, and any applicable tax treaties. If you require assistance to determine the tax treatment of your foreign arrangements in Canada, please consult with our expert Canadian tax lawyers.
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 article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
