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Change to the taxation of social security pensions received from Germany by a resident of Canada - BEGINNING 2005

Canada has an Income Tax Agreement (the Agreement) with the Federal Republic of Germany, which entered into force on March 28, 2002.

Subparagraph 3(c) of Article 18 of the Agreement provides that benefits under the social security legislation of one country that are paid to a resident of the other country, may be taxed in the country of residence. However, the benefits can only be taxed to the extent they would have been taxable if the individual was resident in the first country. This means that the same amount of social security pension payments that would have been included in income if the individual had been a resident of Germany will be included in income in Canada.

Calculation of the non-taxable portion of the German social security pension beginning in 2005:

Beginning in 2005, the taxation of social security pensions received from Germany will change from what it was in 2003 and 2004. (For information about 2003 and 2004, see Change to the taxation of social security pensions received from Germany by a resident of Canada -- 2003 and 2004 .) The change is due to a fundamental reform of the taxation of retirement income in Germany.

Under the new rules, 50 percent of the benefits covered by subparagraph 3(c) of Article 18 is taxable in 2005. This new calculation applies for those who receive a pension in 2005.

For those who start to receive a pension after 2005, the rate to be used in calculating the taxable portion is determined in the year you become eligible to receive your pension. The rate of the pension increases by two percent a year from 2006 to 2020. From 2021 to 2040, the rate increases by one percent a year.

The portion of the pension that is non-taxable is a fixed amount in Euros that remains unchanged for the entire time the pension is received (except in the year of death). It is important to note that the non-taxable portion of the pension is fixed in the year following the year you become eligible to receive the pension, unless the pension began before 2005 in which case the non-taxable portion is fixed in 2005. The non-taxable amount is required to be converted in Canadian dollars using the yearly average exchange rate for that year.

For a survivor's pension, to determine the rate to be used to calculate the taxable portion of the pension, the year the pension is first received is considered to be the year in which the deceased spouse became eligible to receive the pension (see Example 3(b) below).

If you receive retroactive payments because your pension was somehow delayed, the non-taxable portion is calculated as if the payments were received when you were entitled to them.

The increases in the rates for determining the taxable portion of social security pensions are shown in the table below. One hundred percent of social security pensions will be taxable by 2040.

A notice is issued by the social security administration when a pension is granted. On the first page, you will find this sentence: "Die Rente beginnt am [xxx date]." (The pension starts on [xxx date].) Taxpayers should keep the notice for possible future verification. For more information on keeping records, see Information Circular, IC78-10R5, Books and Records Retention/Destruction.

Canadian residents that receive social security pension payments from Germany are required to include the full amount they received in their income. They may then deduct the non-taxable portion of the payments on line 256 of their individual income tax return.

Example 1 (a person who has received a social security pension before 2005):

A Canadian resident has been receiving a monthly social security pension from Germany for many years. The pension was €500 per month as of January 1, 2005. On July 1, 2006, there is a pension adjustment that raises the pension to €510 per month, and on July 1, 2007, there is another that raises it to €520 per month.

How is this pension taxed in 2005, 2006, and 2007?

2005

  1. Calculate your total pension in 2005 (12 months × €500 = €6000)
  2. Convert your total pension in 2005 and enter on line 115 (€6,000 × 1.5090 = $9,054)
  3. Calculate the taxable amount for 2005 (€6,000 × 50% = €3,000)
    (from the chart below, 50% of the total foreign pension received in 2005 is taxable)
  4. Calculate the non-taxable amount for 2005 (€6,000 - €3,000 = €3,000)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2005 and enter on line 256 (€3,000 × 1.5090 = $4,527)

The non-taxable amount claimed in 2005 will remain fixed at €3,000 for the entire time the pension is paid to that individual (except in the year of death). This amount will be converted in Canadian dollars in each of the following years using the average exchange rate for that year.

2006

  1. Calculate your total pension in 2006
    1. 6 months × €500 = €3,000
    2. 6 months × €510 = €3,060
    3. total  €6,060
  2. Convert your total pension in 2006 and enter on line 115 (€6,060 × 1.4237 = $8,627)
  3. Convert the non-taxable amount determined in 2005 and enter on line 256  (€3,000 x 1.4237 = $4,271)
    (amount from step 4 of example 1-2005, converted using the yearly average exchange rate of 2006)

2007

  1. Calculate your total pension in 2007
    1. 6 months × €510 = €3,060
    2. 6 months × €520 = €3,120
    3. total  €6,180
  2. Convert your total pension in 2007 and enter on line 115 (€6,180 × 1.4691 = $9,079)
  3. Convert the non-taxable amount determined in 2005 and enter on line 256 (€3,000 x 1.4691 = $4,407)
    (amount from step 4 of example 1-2005, converted using the yearly average exchange rate of 2007)

Example 2 (a person who will start receiving a social security pension for the first time in the year 2005):

A Canadian resident receives a monthly social security pension of €500 per month as of September 1, 2005 from Germany. The pension increases in 2006 and 2007 are the same as in Example 1. How is this pension taxed in 2005, 2006, and 2007?

2005

  1. Calculate your total pension in 2005 (4 months × €500 = €2,000 )
  2. Convert your total pension in 2005 and enter on line 115 (€2,000 × 1.5090 = $3,018)
  3. Calculate the taxable amount for 2005 (€2,000 × 50% = €1,000)
    (from the chart below, 50% of the total foreign pension received in 2005 is taxable)
  4. Calculate the non-taxable amount for 2005 (€2,000 - €1,000 = €1,000)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2005 and enter on line 256 (€1,000 × 1.5090 = $1,509)

2006

  1. Calculate your total pension in 2006
    1. 6 months × €500 = €3,000
    2. 6 months × €510 = €3,060
    3. total €6,060
  2. Convert your total pension in 2006 and enter on line 115 (€6,060 x 1.4237 = $8,627)
  3. Calculate the taxable amount for 2006 (€6,060 x 50% = €3,030)
    (from the chart below, 50% of the total foreign pension received in 2006 is taxable)
  4. Calculate the non-taxable amount for 2006 (€6,060 - €3,030 = €3,030)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2006 and enter on line 256 (€3,030 x 1.4237 = $4,314)

The non-taxable amount claimed in 2006 will remain fixed at €3,030 for the entire time the pension is paid to that individual (except in the year of death). This amount will be converted in Canadian dollars in each of the following years using the average exchange rate for that year.

2007

  1. Calculate your total pension in 2007
    1. 6 months × €510 = €3,060
    2. 6 months × €520 = €3,120
    3. total €6,180
  2. Convert your total pension in 2007 and enter on line 115 (€6,180 x 1.4691 = $9,079)
  3. Convert the non-taxable amount determined in 2006 and enter on line 256 (€3,030 x 1.4691 = $4,451)
    (amount from step 4 of example 2-2006, converted using the yearly average exchange rate of 2007)

Example 3 (taxation of a deceased pensioner and a survivor's pension):

The facts are the same as in Example 2 for 2005 and 2006. However, the pensioner dies on June 30, 2007. His widow receives a widow's pension of €300 per month as of July 1, 2007. On July 1, 2009, there is a pension adjustment that increases the widow's pension to €320 per month.

3(a) How is the pensioner taxed in the year of death?

For 2005 and 2006, the answer is the same as for Example 2.

2007

  1. Calculate the total pension in 2007 (6 months × €510 = €3,060)
  2. Convert the total pension in 2007 and enter on line 115 (€3,060 × 1.4691 = $4,495)
  3. Prorate the non-taxable amount from 2006 in year of death 181/365 days (€3,030 × 181/365 = €1,515)
    (181/365 of step 4 of example 2-2006)
  4. Convert the prorated non-taxable amount determined in 2006 and enter on line 256 (€1,515 × 1.4691 = $2,226)

3(b) How is the widow taxed in 2007 to 2009?

The pension is still considered a pension that started in 2005, (i.e., the percentage taxable remains unchanged).

2007

  1. Calculate the total pension in 2007 (6 months × €300 = €1,800)
  2. Convert the total pension in 2007 and enter on line 115 (€1,800× 1.4691 = $2,644)
  3. Calculate the taxable amount for 2007 (€1,800 × 50% = €900)
    (from the chart below, 50% of the total foreign pension received in 2007 is taxable)
  4. Calculate the non-taxable amount for 2007 (€1,800 - €900 = €900)
    amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2007 and enter on line 256 (€900 × 1.4691 = $1,322)

2008

  1. Calculate the total pension in 2008 (12 months × €300 = €3,600)
  2. Convert the total pension in 2008 and enter on line 115 (€3,600 × 1.5603 = $5,617)
  3. Calculate the taxable amount for 2008 (€3,600 × 50% = €1,800)
    (from the chart below, 50% of the total foreign pension received in 2008 is taxable)
  4. Calculate the non-taxable amount for 2008 (€3,600 - €1,800 = €1,800)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2008 and enter on line 256 (€1,800 × 1.5603 = $2,809)

The non-taxable amount claimed in 2008 will remain fixed at €1,800 for the entire time the pension is paid to that individual (except in the year of death). This amount will be converted in Canadian dollars in each of the following years using the average exchange rate for that year.

2009

  1. Calculate the total pension in 2009
    1. 6 months × €300 = €1,800
    2. 6 months × €320 = €1,920
    3. total  €3,720
  2. Convert the total pension in 2009 and enter on line 115 (€3,720 × 1.6492 = $6,135)
  3. Convert the non-taxable amount determined in 2008 and enter on line 256 (€1,800 × 1.6492 = $2,969)
    (amount from step 4 of example 3(b)-2008, converted using the yearly average exchange rate of 2009)

Example 4 (social security pensions starting after 2005):

A Canadian resident began receiving a monthly social security pension from Germany of €520 per month on July 1, 2006. On July 1, 2007, there is a pension adjustment that raises the pension to €530 per month, and on July 1, 2008, there is one that raises it to €540 per month. How is this pension taxed in 2006, 2007, and 2008?

2006

  1. Calculate your total pension in 2006 (6 months × €520 = €3,120)
  2. Convert your total pension in 2006 and enter on line 115 (€3,120 × 1.4237 = $4,442)
  3. Calculate the taxable amount for 2006 (€3,120 × 52% = €1,622)
    (from the chart below, 52% of the total foreign pension received in 2006 is taxable)
  4. Calculate the non-taxable amount for 2006 (€3,120 - €1,622 = €1,498)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2006 and enter on line 256 (€1,498 × 1.4237 = $2,133)

2007

  1. Calculate your total pension in 2007
    1. 6 months × €520 = €3,120
    2. 6 months × €530 = €3,180
    3. total  €6,300
  2. Convert your total pension in 2007 and enter on line 115 (€6,300 × 1.4691 = $9,255)
  3. Calculate the taxable amount for 2007 (€6,300 ×52% = €3,276)
    (from the chart below, 52% of the total foreign pension received in 2007 is taxable)
  4. Calculate the non-taxable amount for 2007 (€6,300 - €3,276 = €3,024)
    (amount from step 1 minus amount from step 3)
  5. Convert the non-taxable amount for 2007 and enter on line 256 (€3,024 ×1.4691 = $4,443)

The non-taxable amount claimed in 2007 will remain fixed at €3,024 for the entire time the pension is paid to that individual (except in the year of death). This amount will be converted in Canadian dollars in each of the following years using the average exchange rate for that year.

2008

  1. Calculate your total pension in 2008
    1. 6 months × €530 = €3180
    2. 6 months × €540 = €3240
    3. total  €6,420
  2. Convert your total pension in 2008 and enter on line 115 (€6,420 × 1.5603 = $10,017)
  3. Convert the non-taxable amount determined in 2007 and enter on line 256 (€3,024 × 1.5603 = $4,718)
    (amount from step 4 of example 4-2007, converted using the yearly average exchange rate of 2008)

If you do not know how to calculate the portion of the German social security pension income that is non-taxable, please contact us.

If you do not know whether the pension income you received was paid under the social security legislation of Germany, please contact your payer for more information.

Table of rates to be used in calculating the taxable portion of social security pensions

Table of rates to be used in calculating the taxable portion of social security pensions
Year pension starts Percentage taxable Year pension starts Percentage taxable
2005 or earlier 50 2023 83
2006 52 2024 84
2007 54 2025 85
2008 56 2026 86
2009 58 2027 87
2010 60 2028 88
2011 62 2029 89
2012 64 2030 90
2013 66 2031 91
2014 68 2032 92
2015 70 2033 93
2016 72 2034 94
2017 74 2035 95
2018 76 2036 96
2019 78 2037 97
2020 80 2038 98
2021 81 2039 99
2022 82 2040 and onwards 100

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