For the week of October 24, 2012
► Step one: set your goals, says David Christianson
► Economic update: Dispelling global uncertainty
► Evelyn Jacks: New relationship? Beware of tax consequences
► Poll Question: Should governments increase taxes on investment income dividends and capital gains to increase revenues and meet their responsibilities?
► DISTINGUISHED PRACTICES: Tips for Real Wealth Managers™: Broader interpretation of transfer pricing
► Did You Know? Legislation in both official languages
► Tax Tips: How the CRA is helping small business
► Featured Book: Master Your Money Management
► Featured Web Tools: Featured Program: EverGreen Explanatory Notes
Did You Know? How to report German Social Security Income
If you — or your client — receive a social security pension from Germany, you need to take note when filing your income tax return. It is a two-step process and, depending on when you began receiving the pension, the calculations will vary.
If you receive a pension from another country, you must report the total annual amount — in Canadian dollars — on line 115 of your income tax return. (To convert euros to Canadian dollars, go to the Bank of Canada website to find the exchange rate in effect the day you received the pension; if you received pension payments throughout the year, you must calculate the average annual exchange rate. Most income tax software has the annual exchange rates built in.)
Since Canada has a tax treaty with Germany, you then claim a deduction on line 256 for the part of your foreign pension income that is tax-free in Canada. This is where it gets complicated. The Canada-Germany tax treaty was amended in 2005, which changed the calculation of the taxable and non-taxable portions. Under the new rules, says Canada Revenue Agency (CRA), 50% of the benefits were non-taxable in 2005. This new calculation applied to all persons who were already receiving a pension, or who started receiving a pension in 2005. But for those who received a pension after 2005, the taxable amount increases each year by 2%. For a table showing the taxable portion, go to www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/grmny2005-eng.html. Remember: the exempt portion in each subsequent year is the amount (in euros) that is exempt in the first full year that the pension is received.
One Knowledge Bureau Report reader ran afoul of the CRA when he was splitting pension income between spouses. If you are looking to split income, use the net amount — not line 115. If you're claiming a foreign tax credit for the taxes paid to Germany, be sure that you split the foreign tax credit claim as well if you split the income.