Disclaimer – This article is for the benefit of Canadian residents receiving German pensions. Readers are cautioned that information in this article is for general purposes only and does not purport to provide specific advice. Individuals should consult with a tax professional. The author bears no responsibility for the use or dissemination of this information.
The German Tax Authorities have required the filing of German Tax Returns for the tax years 2005 and onwards for Canadian taxpayers who have received pensions from Germany. The Canadian – German Tax Treaty was revised in 2002, and became effective in 2005. The tax treaty revisions included the ability for German Tax authorities to assess tax on Canadian residents who receive German social security pension income from Germany.
The tax treatment of German pension income in Canada mirrors the rules in Germany, which in Canada basically allows for a non taxable portion equal to approximately 50% depending on the year in which the German pension commenced.
In 2010, the German Tax authorities in Neubrandenburg began sending notices to Canadian residents who were receiving German pensions, requesting reporting and filing German tax returns for their German pension income. These notices typically covered the five year period 2005-2009 and required Canadian taxpayers to prepare and file their German Tax returns with Germany, following which the taxpayers received a German Tax “Notice of Assessment” known as a “Bescheid”, indicating the tax amount owing (in Euro’s) complete with due date and payment instructions. The notices were written in German. Furthermore, not all Canadian taxpayers receiving German pensions received these notices from Neubrandenburg during this initial wave.
In response to feedback from Canadian taxpayers, and also to contact other taxpayers who did not receive a notice from the German tax authorities in 2010, the German Tax authorities in Neubrandenburg have revised the process. The format has been changed such that the German Tax authorities completed the German Tax return (“Bescheid”) for the Canadian taxpayers, using information from the German social security organization. During 2012 many other Canadian taxpayers have received a German Tax “Notice of Assessment” for the years 2005-2006. At the time of writing this article (July 2013), “Bescheids” for the taxation years 2007 and onwards are being sent to Canadian residents who receive German social security pension. It would be prudent for taxpayers to review the assessment with a tax professional to ensure that it is accurate. In most cases, there will indeed be tax owing to the German Tax Authorities. In accordance with the Canadian / German Tax Treaty, the German tax assessments represent a legal obligation for Canadian taxpayers to pay.
Low Income Taxpayers
The German Tax authorities provide 2 options for non-residents who receive German social security pensions to be taxed with “unlimited” tax liability, which means that the non-resident would be entitled to receive the same basic deductions that taxpayers would be entitled to receive if they were a resident of Germany. This in turn would result in a lower German tax liability for the German pension. However, in order to qualify for “unlimited” German tax liability, there are various criteria that need to be met.
The 2 options are as follows:
Under this method, the taxpayer’s German pension must be equal to or greater than 90% of their taxable worldwide income. For Canadians, this means that the German pension income must be at least 90% of their total income. Total income for a Canadian resident would be worldwide income, excluding income such as Old Age Security (OAS) which is generally tax-free in Canada. It would only include 50% of the German social security pension income. The taxpayer would need to provide the German tax authorities with proof of their worldwide income by way of a verification letter from the Canada Revenue Agency. In reality, it is very unlikely that a Canadian resident would qualify under the 90% rule as most Canadian residents receive very little German pension income in comparison to their total income. I have never encountered such a situation.
Total worldwide income less than prescribed German income threshold
Under this method, the taxpayer’s worldwide taxable income that is not taxable in Germany would need to fall below thresholds prescribed by the German tax authorities. The threshold are as follows; 2005 – 2007: 6,136 Euros, 2008: 7,664 Euros, 2009: 7,834 Euros, 2010 onwards: 8,004 Euros. Once again, the taxpayer would need to provide the German tax authorities with proof of their worldwide income by way of a verification letter from the Canada Revenue Agency. The German tax authorities convert the taxable income to EURO’s using average exchange rates. Although unlikely, it is possible for Canadian residents to qualify under this method, and I have seen a few examples where it has.
If the taxpayer qualifies for unlimited German tax liability under either of these methods, the tax savings can be significant.
German Pension – Source Deductions
A frequently asked question is whether or not arrangements can be made so that German income tax can be deducted at source by the German pension authorities. The taxpayer would receive the pension income after taxes in this situation, and wouldn’t have to worry about further tax obligations to Germany. It would also be a very effective way to claim a foreign tax credit (FTC) on the taxpayer’s Canadian income tax return because the FTC could be claimed on the current year’s Canadian tax return, rather than filing separately after the fact. It would also enable taxpayers and caregivers to maintain their filings on a current basis. Unfortunately, the German tax authorities only seem to permit this for pensioners receiving higher pensions. Nonetheless, I would recommend checking this with the German tax authorities, to determine if this can be arranged.
CRA – Voluntary Disclosure Program
Permanent residents of Canada, are responsible for including their worldwide income in their Canadian tax returns. This includes German social security and private pension income (with some exceptions). The new Canadian / German Tax Treaty which became effective in 2005, caught many Canadian residents receiving German pensions off guard. Prior to 2005, the German pensions were essentially tax-free in Canada in that a full deduction could be taken on the Canadian income tax return. All that changed in 2005, when only a portion of the German pension became deductible. Taxpayers who wish to report their unreported German pensions retroactively with CRA, might be eligible to report this using the Voluntary Disclosure Program. The details of this program can be located on the CRA web-site, and for those who are eligible, penalties are waived by CRA.
Caregivers of German Pensioners
German pensioners resident in Canada are getting older, some are in their 80’s and 90’s, and often are not able to manage the complexities of these pension and taxation issues. The caregivers of pensioners (spouses, children, nieces, nephews etc.) are usually called upon to assist in their financial affairs. In these situations, it is important for the caregivers to be aware of their obligations and legalities. Written Power of Attorneys should be in place so that the caregiver is able to represent the taxpayer. Taxation obligations to German and Canadian tax authorities should be understood and acted upon so that the various filings are current and taxes paid.
As an example, the German tax authorities will send Tax Assessments (“Bescheids”) to the taxpayer on a bi-annual basis, free of charge. However, the taxpayer or caregiver will be responsible for reviewing the tax assessment for accuracy, submitting any taxes owing to the German Tax authorities. For Canadian residents, the German pension income must be included on line 115 of the Canadian income tax return (there are some exceptions), with the appropriate deduction taken on line 256.
It is my humble opinion that taxpayers and their caregivers should seriously consider using the services of professional Canadian and German tax accountants, to manage these filings. Yes, there will be fees for providing the services, but having tax professionals deal with these complexities can save you time, money and ensure that the filings are completely accurately, and on time.
If a Canadian resident and recipient of a German pension, passes away before they receive the German Tax assessment (Bescheid) from the German Tax authorities, the surviving spouse, or the estate of the deceased, is responsible for paying the German tax obligation. Yet another reason to keep filings as current as possible.
Individuals, who are permanent residents of Canada, are required to include “worldwide income” in their Canadian Income tax returns. The key point is residency, not citizenship. Canadian Income tax laws are based on residency in Canada. In this situation, German immigrants who are full-time residents of Canada must include their German pension income on their Canadian income tax returns (Line 115 of the Canadian Income tax return). The German pension income should be converted into Canadian dollars at the appropriate exchange rate for the particular taxation year. The taxpayers may also be entitled to a partial tax deduction for the German pension income on Line 256. However, it is important to note that the Canada Revenue Agency (CRA) has very specific rules and calculations that must be followed to determine if a deduction is allowable, and the amount of the deduction. For instance, a partial deduction for German Social Security pension income is allowable on line 256, but the amount of the deduction is based on several determining factors including when the pension payments began. CRA often requires support documentation for deductions claimed on line 256, and may deny the deduction completely or a portion of the deduction, if it is not calculated correctly and adequately supported. It is advisable to use the services of a tax professional in these situations.
Foreign Tax Credits
If the German Pension income has been declared by Canadian taxpayers in their Canadian Income Tax Returns prepared and submitted during 2005 and onwards, and taxes paid to Canada Revenue Agency (CRA) there is very likely to be a duplicate taxation situation. A portion, or all of the tax paid to Germany may be recoverable from CRA by virtue of the tax treaty between Canada and Germany. The method to recover from CRA the tax paid to Germany is known as a Foreign Tax Credit. It is important to note that the Foreign Tax Credit must be applied for separately for each taxation year. CRA will accept a deduction for foreign taxes on the individual’s income tax return but only if the taxes were paid in the same year. In other words, German taxes paid in 2012 can be claimed by the Canadian taxpayer in 2012. German taxes paid in previous years, which is often the case in these situations, must be recovered using separate Foreign Tax Credit filing with CRA. It is important to maintain proper documentation for CRA to verify the foreign tax credit.
Another important concept to keep in mind is the method used by CRA to calculate the foreign tax credit. Just because taxes were paid to Germany, it does not necessarily mean that the Canadian resident will receive a refund for these taxes from Canada. The reason is that CRA compares the German pension income (converted to Canadian dollars) to the Canadian resident’s total income, and applies this ratio to Canadian federal and provincial taxes paid. For low income Canadian taxpayers, there usually is little or no Canadian taxes that were paid. In this situation, very little or no foreign taxes can be recovered by CRA. In situations where a large amount Canadian taxes have been paid, the foreign tax credits can be very significant and worth pursuing. In any event, as a result of the calculation there is usually a portion of the German tax that cannot be recovered from CRA – it is “stranded”.
Unless Canadian residents qualify for “unlimited” German tax liability as explained in this article, which most likely will not be the case, they will be taxed by the German tax authorities at the full amount of their gross pension income. As a result, taxpayers can expect that the taxes will be higher in Germany than in Canada for the same income.
About the author
Gary Schein, CPA, CGA, MBA of Edelkoort Smethurst Schein CPAs LLP, is Fully Registered in Public Practice with the Chartered Professional Accountants of Ontario to provide Corporate and Personal Taxation, and Financial Statement Compilation services to the public, is an authorized Canada Revenue Agency (CRA) e-filer, and is also an Internal Revenue Service (IRS) Registered U.S. Paid income Tax Preparer. Gary Schein is also an IRS Certified Acceptance Agent.
More specifically, I have experience in preparing the Foreign Tax Credit filings required by CRA to recover foreign tax credits pertaining to German taxation. Essentially my services entail a review of the taxpayer’s Canadian Income Tax returns and German Notice of Assessments for the periods 2005 and onwards, followed by preparation and filing of the required foreign tax credit forms. Although I have had involvement with reviewing the German notice of assessments (“Bescheid”) for completeness and accuracy, I rely upon my associate, who is a German tax professional (“Steuerberater”) with years of experience in German tax filings, to assist with German tax filings.
If you require further assistance, please contact my office to schedule an appointment. I don’t mind talking to you for a minute or so as an introduction. If you prefer to have a tax consultation prior to engaging my services, there is a fee for this service. The fee for a 1 hour consultation is $300 + HST during which time I will provide an in-depth review your situation, and provide specific tax guidance. I would greatly appreciate the consultation fee being paid at the time the meeting via personal cheque, credit / debit card, or e-interact. Thank you very much – I look forward to hearing from you and supporting you with your income tax filings.
Gary Schein, CPA, CGA, MBA
Edelkoort Smethurst Schein CPA’s LLP
Chartered Professional Accountants
4903 Thomas Alton Boulevard, Suite 207
Burlington, Ontario, Canada L7M 0W8
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.