Feb 03, 2026
In November 2022, the Canada Revenue Agency (CRA) addressed questions concerning the Canadian income tax implications of transferring the commuted value of benefits from a UK defined-benefit pension plan (“UK DB Plan”) to a self-invested personal pension (“UK SIPP”) by a Canadian tax resident.
Specifically, the inquiry focused on whether such a transfer results in taxable income under paragraph 56(1)(a) of the Income Tax Act (the “ITA”), either through the doctrine of constructive receipt or the application of subsection 56(2) of the ITA.
The CRA was also asked to comment on whether the transfer constitutes a “contribution” to a non-resident trust for purposes of subsection 94(1) of the ITA.
A Canadian Taxpayer Transferred his UK Pension to SIPP
An individual originally resident in the UK became a member of a UK DB Plan through his UK employer, with all pension entitlements relating to services rendered while resident and employed in the UK. Although the employer made contributions to the plan, no contributions were made during any period in which the individual was a non-resident of the UK.
After moving to Canada, the individual established a UK SIPP—structured as a trust under UK law—for which he is the sole beneficiary. The individual, while under age 55, subsequently directed a direct plan-to-plan transfer of the commuted value (“Commuted Value”) from the UK DB Plan to the UK SIPP.
Under UK legislation, investment income inside a SIPP is tax-sheltered until withdrawal, and funds generally cannot be accessed before age 55. Transfers from a DB Plan to a SIPP require trustee approval and independent financial advice to ensure the transfer serves the member’s best interests.
Pension Benefits Income Inclusion Under Paragraph 56(1)(a) of the ITA
The CRA emphasized that its comments are general in nature and do not constitute binding advice unless provided through an advance income tax ruling.
Subparagraph 56(1)(a)(i) of the ITA requires taxpayers to include pension benefits received in the year, including those from foreign pension plans tied to services performed while the individual was a non-resident of Canada.
A central issue is whether a transfer directly between plan administrators constitutes “receipt” of a pension benefit. Under the doctrine of constructive receipt, amounts made available to a taxpayer—credited for his benefit or set apart without restriction—are treated as received for tax purposes even if not physically paid to him.
The CRA concluded that the individual is considered to have constructively received the Commuted Value when it is transferred to the SIPP. Although the funds never pass through the taxpayer’s hands, the transfer effectively sets the amounts apart for the individual’s benefit, satisfying the constructive-receipt threshold. As a result, the Commuted Value must be included in the individual’s income in the year of the transfer under subparagraph 56(1)(a)(i) of the ITA.
Even if constructive receipt did not apply, the CRA noted that subsection 56(2) would produce the same result. This provision captures situations where a taxpayer directs that an amount—otherwise taxable if paid to him—be paid to a third party. A transfer from a foreign pension plan to a SIPP at the direction of the individual falls squarely within this rule.
The CRA also confirmed that neither the ITA’s tax-deferred rollover provisions nor the Canada-UK Tax Convention provide relief for transfers between foreign pension plans.
Whether the Transfer Is a “Contribution” Under Subsection 94(1)
Subsection 94(1) of the ITA governs contributions to non-resident trusts and is relevant when determining the Canadian tax obligations associated with such structures.
In both scenarios considered—whether the individual had personally contributed to the UK DB Plan while UK-resident, or whether only the employer contributed—the CRA’s view is the same: once the individual is considered to have received the Commuted Value, he is then considered to have transferred that amount to the UK SIPP. This constitutes a “contribution” under paragraph (a) of the definition in subsection 94(1) of the ITA.
The CRA did not comment on any further implications of section 94 for the SIPP trust, as that was outside the scope of the request.
Pro tax tips – Transfer of foreign pension requires careful tax planning
Constructive receipt is a principle that deems an amount to be received for tax purposes when it is made available to a taxpayer without substantial restriction, even if not physically paid out. Therefore, a taxpayer would still be deemed to have received the full amount of the pension even if he simply transferred one pension plan to another without even making any withdrawal.
To avoid such undesirable tax consequence, it’s highly recommended that taxpayers consult with an experienced Canadian tax lawyer to thoroughly evaluate all the options.
FAQ:
What is the doctrine of constructive receipts?
Constructive receipt is a tax concept that determines when an amount is considered to have been received by a taxpayer, even if it has not actually been paid out in cash or property. In the context of Canadian tax law, particularly for employment income, constructive receipt is relevant for determining the timing of income inclusion.
Are foreign pensions taxable in Canada?
Yes, subparagraph 56(1)(a)(i) of the ITA requires taxpayers to include foreign pension benefits received in the year tied to services performed while the individual was a non-resident of Canada.
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.
