Tax Treatment of German Pensions

In our last issue of Breaking Tax and Investment News we covered tax treatment of various foreign pensions. The taxation of German pensions are featured today, as the rules have changed recently and it may be helpful to discuss this with your clients from a retirement income planning point of view.

Retirement Pensions [Corrected]
Under Canada's tax treaty with the Federal Republic of Germany, retirement pensions form Germany that are received by a Canadian resident are taxable in Canada, and taxable in Germany. The full amount of such pensions, in Canadian dollars, should be included in income. A foreign tax credit is available for any tax withheld at source.

War Pensions
Likewise, periodic or non-periodic payments received by a resident of Canada from Germany as compensation for an injury or damage as a result of hostilities are taxable only in Germany.

Social Security
As a result of recent pension reform in Germany, for social security pensions which began in 2005 or earlier, 50% of the pension is non-taxable in Canada 2005 and 2006.

After 2006, the dollar amount which was non-taxable in 2006 remains non-taxable in each subsequent year until the year the taxpayer dies.

For pensions which begin after 2005, the percentage that is non-taxable in Canada is set in the year the pension starts, see the chart below. The 50% rate for 2005 increases by 2% each year for the period 2006 to 2020 and then increases by 1% each year until the taxable percentage reaches 100% for pensions which begin in 2040 or later. The non-taxable amount determined in the second year remains constant for all subsequent years.

Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion
2005 or before 50% 2017 74% 2029 89%
2006 52% 2018 76% 2030 90%
2007 54% 2019 78% 2031 91%
2008 56% 2020 80% 2032 92%
2009 58% 2021 81% 2033 93%
2010 60% 2022 82% 2034 94%
2011 62% 2023 83% 2035 95%
2012 64% 2024 84% 2036 96%
2013 66% 2025 85% 2037 97%
2014 68% 2026 86% 2038 98%
2015 70% 2027 87% 2039 99%
2016 72% 2028 88% 2040 or later 100%
 
Example: Pensions which begin after 2005
John is a Canadian resident who began receiving monthly payments under the social security legislation of Germany in the amount of $1,000 on July 1, 2006. This pension is taxed as follows:
2006: Total pension received during the year (line 115) = $6,000
  Taxable portion = 0.52 x $6,000 = $3,120
  Non-taxable amount (line 256) = $6,000 - $3,120 = $2,880
2007: Total pension received during the year (line 115) = $12,000
  Taxable portion = 0.52 x $12,000 = $6,240
  Non-taxable amount (line 256) = $12,000 - $6,240= $5,760
2008 and later: Non-taxable amount (line 256) remains at $5,760 each year regardless of the amount of pension received (except in the year of death).

Proration: Death of Pensioner. In the year the taxpayer dies, the non-taxable portion is prorated for the number of days the person was alive in the year.

Audit-proofing. These German pensions and their exempt portions are often audited. The taxpayer must provide the notice issued by the German social security administration, which states when the pension was started. Look for the sentence that reads: "Die Rente beginnt am [xxx date]." (The pension starts on [xxx date].)

Survivor s Pensions. If a survivor pension is paid to a surviving spouse, the pension is considered to have started when the original pension started. In the first year of the pension, the applicable percentage is applied to determine the taxable portion. In the second year (the first year that the pension is received for the full year), that percentage is once again applied and the non-taxable portion determined is the non-taxable portion for all subsequent years, until the year of death of the survivor.

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