Change to the taxation of social security pensions received from Germany by a resident of Canada -- 2003 and 2004

The new Canada-Federal Republic of Germany Tax Agreement ("the new treaty") entered into force on March 28, 2002. The new treaty changed the way social security pensions received from Germany by a resident of Canada are taxed, starting in the 2003 tax year.

Under the old Canada-Federal Republic of Germany Tax Agreement ("the old treaty"), payments under the social security legislation of Germany were not taxable in Canada.

Subparagraph 3(c) of Article 18 of the new treaty provides that benefits under the social security legislation of one State that are paid to a resident of the other State are taxable in the State of residence (the other State) to the extent they would have been taxable if the individual had been resident in the first State. 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.

The provisions of the new treaty were generally effective for tax years after December 31, 2000. However, the new treaty provided an interim relief period. Up to and including 2002, social security pension payments were taxed under the old treaty if it provided greater relief from tax. Since under the old treaty Canada could not tax social security payments received from Germany, the old treaty provided greater relief.

Beginning in 2003, Canada will tax the same portion of the pension payments that Germany would tax if the individual were resident in Germany. This portion is roughly based on the income earned in the pension.

The chart below shows the percentage of the payments that are now taxable. The taxable portion depends on the age of the taxpayer on the date the pension payments first began. This date can be found on the notice issued by the social security administration when the pension was 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.

Note
If your pension payments began before January 1, 1955, see the alternate instructions at the end of the chart below.

Canadian residents receiving social security pension payments from Germany are required to include the full amount 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
In 2003, a Canadian resident received social security payments of $10,000 from Germany.

If the payments began after the individual turned 65 (but before he or she turned 66), the taxable portion from the table is 27%. This percentage will remain unchanged over the lifetime of the recipient.

The individual must report the full $10,000 on line 115 of his or her 2003 individual income tax return.

The deduction on line 256 is $7,300. It is calculated as follows:

The taxable is portion is: $10,000 × 27% = $2,700
The deduction on line 256 is: $10,000 − $2,700 = $7,300

If you do not know how to calculate the portion of the German social security pension income that is tax free, 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.

Note
The treatment of other pensions has not changed under the new treaty.

Age reached by the taxpayer when the pension payment started Taxable portion of the pension Age reached by the taxpayer when the pension payment started Taxable portion of the pension
0 to 3 73% 55 38%
4 to 5 72% 56 37%
6 to 8 71% 57 36%
9 to 11 70% 58 35%
12 to 13 69% 59 34%
14 to 15 68% 60 32%
16 to 17 67% 61 31%
18 to 19 66% 62 30%
20 to 21 65% 63 29%
22 to 23 64% 64 28%
24 to 25 63% 65 27%
26 to 27 62% 66 26%
28 61% 67 25%
29 to 30 60% 68 23%
31 59% 69 22%
32 to 33 58% 70 21%
34 57% 71 20%
35 56% 72 19%
36 to 37 55% 73 18%
38 54% 74 17%
39 53% 75 16%
40 52% 76 15%
41 to 42 51% 77 14%
43 50% 78 13%
44 49% 79 12%
45 48% 80 to 81 11%
46 47% 82 10%
47 46% 83 9%
48 45% 84 to 85 8%
49 44% 86 to 87 7%
50 43% 88 6%
51 42% 89 to 91 5%
52 41% 92 to 93 4%
53 40% 94 to 96 3%
54 39% 97 and older 2%

Note
For pension payments that began before January 1, 1955, use the percentage for your age on January 1, 1955. For example, if your pension began in 1950, and you were 28 years old on January 1, 1955, use 61%.

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