German Pension Recipients Beware – CRA Re-assessment is not always accurate steuerfreier Teil der Rente = tax exempt amount = Line 256 00
CRA Review and Verification Section are sending out letters requesting proof for Line 256 00 additional deduction. They quite often disallow it on some arbitrary reasons and are quick to send out the Collections Notice to the taxpayer. Quite often the pensioner complies and ends up paying the CRA requested amount. Canada is therefore charging taxes on the pensioner’s tax exempt income.
GERMAN PENSION TAXATION HISTORY: Tax Exemption Amounts Updated from time to time
Prior to 2002 NON TAXABLE — 2002-2005 Pension taxable with tax exempt amount dependant on the age of the pensioner — 2005 – 2040 Pension taxable with tax exempt amount dependent on the date the pension began. Since 2012 (child rearing years, survivors pension, etc.) caused changes to the original 2005 tax exempt amounts. This results in a different tax exemption amount as established in 2005.
Article 18 of the Canada – Germany Tax Treaty
Parag. 3 (c) benefits under the social security legislation in GERMANY paid to a resident of CANADA may be taxed in CANADA, but the amount of any such benefits that would be excluded from taxable income in GERMANY if the recipient were a resident thereof shall be exempt from taxation in CANADA;
Protocol to the Agreement Between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation With Respect to Taxes on Income and Certain Other Taxes, the Prevention of Fiscal Evasion and the Assistance in Tax Matters
7. With reference to Article 18, paragraph 3, subparagraph (c), the competent authority of a Contracting State shall notify the competent authority of the other Contracting State of changes made to the amount of social security benefits excluded from the taxable income of a resident of the first-mentioned State receiving such benefits. (This change is clearly marked on the Bescheid)
This should never change: GERMANY Tax Exemption Amount = CANADA Tax Exemption Amount
Germany is only taxing the taxable portion of the pension.
BUT by CRA disallowing Line 256 00 – Canada is taxing 100% of the German Pension.
Some CRA disallowed reasons: Taxpayer did not provide their age of when their pension started. The income is taxable in Canada. The exempt amount does not match the 2005 exempt amount CRA has on file. The most common is the taxpayer did not provide an Official Certified Translation verifying Line 256 00.
IF YOU DO NOT WANT TO PAY CANADA TAXES ON YOUR GERMAN PENSION EXEMPT AMOUNT – IT IS MANDATORY THAT YOU PROVIDE CRA, IF REQUESTED, WITH AN OFFICIAL CERTIFIED TRANSLATION. This extra demanded expense is tax deductible for you.
Advisors: Tell Your Clients these Bank Letters are NOT a Scam
Clients with foreign bank accounts or who are residents for tax purposes of any country other than Canada or the U.S. may have started receiving letters from their financial institutions requesting information, such as Social Insurance Numbers or foreign Tax Identification Numbers. While this might seem like the makings of a phishing scheme, it’s completely legit — and legally clients must comply.
Under the Common Reporting Standard (CRS), which became effective in Canada July 1, 2017, financial institutions are required to report such information annually to the Canada Revenue Agency beginning in May 2018. The CRA will subsequently exchange this information with tax authorities of the countries with which Canada has an agreement.
The CRS, developed by the Organization for Economic Co-operation and Development with the support of Canada and the other G20 industrialized countries, is a global model for the automatic exchange of information on financial accounts (such as bank, mutual fund and brokerage accounts, and some annuities and life insurance policies). It is intended to combat global tax evasion and improve tax compliance.
Customers who hold accounts with Canadian financial institutions may be required to confirm their tax residency status and provide TINs (tax identification numbers) for all countries in which they are a resident for tax purposes. Canadian financial institutions and their customers will be required by law to comply with the CRS.
It is important for customers to respond to requests from financial institutions to provide required information about their tax residency and TINs. For Canada, a Social Insurance Number (SIN) is a Canadian individual resident’s TIN and in Germany, for example, it is the 11-digit ID- number (Identifikationsnummer).
Financial institutions cannot provide advice about tax residency rules to customers. It is possible to be a tax resident in more than one country. Customers who are unsure about their tax residency should consult a tax advisor. The OECD has information about tax residency rules for CRS participating countries.
If a Canadian resident has a reportable financial account in another country that has agreed to exchange information with Canada, the financial institution in that country will be required to report information to their local tax authority, which will then exchange that information with the CRA.
If an account is reportable, the CRS requires financial institutions to provide the following information to the local tax authority (e.g. CRA):
- Account holder’s:
- Date of birth (for individuals)
- Tax identification number (TIN) (if country issues TINs)
- Country (countries) of tax residence
- Account number
- Account balance or value (or the closure of the account)
- Amount of interest, dividends, gross proceeds and other payments made or credited to the account (if applicable).
Other countries participating in the CRS may require additional information to be reported to their local tax authorities (such as the account holder’s place of birth).
It is important to understand that the “automatic exchange of information” reporting will not release account holders from their tax declaration obligations to their local tax authorities. Due to different reporting requirements, the data of accounts contained in the annual tax report may differ from the data reported within the framework of information exchange.
Please Note: T-1 Adjustments for the Foreign Tax Credit, which would typically take CRA about two months to process, is in some cases now taking more than 10 months. Be sure to allow much more time to get your results from CRA, as advisors have no influence on CRA to speed up the process for the clients.
Six point Summary of key issues Canadian Advisors need to know Re: Taxation of German Social Security Pension
The German Tax Office FINANZAMT NEUBRANDENBURG (FAN) has the special authority for the assessment of German Pension recipients living abroad and for the registration of foreign tax consultants. It consists of a Tax Return Processing Centre a Tax Collection Centre and a Tax Enforcement Centre.
1 – Tax Return filing to Germany is optional – Germany automatically sends out several years of tax Assessments at one time to the pensioner. NOTE: Many German pensioners still only have been assessed to the 2011 – 2013 tax years.
To bring pensioner up to date – actual missing years’ tax returns should be filed to FAN now. FAN will then send out those missing years Assessments within a couple of months.
2 – Once German Tax Assessments have been received the pensioner has about 2 months to pay the taxes or file an objection asking to qualify for the lower tax rate.
3 – If requesting to be assessed at the lower tax rate – a 1A – Unlimited Tax Liability Tax Return needs to be filed with the proper supporting Canadian documentation attached and sent to the FAN.
Canada applies a withholding tax on non-resident Pension payments. Germany has refused to do so and therefore pays out the full pension amount to the pensioner.
4 – If Germany is deducting taxes from the Pensioners German Pension or installment tax payments are having to be paid the PENSIONER PROBABLY HAS AN OUTSTANDING GERMAN TAX LIABILITY at the FAN Collections or Garnishment Office.
5 – Upon death of the pensioner a Death Certificate needs to be sent to the FA Neubrandenburg. It will then send out a short Heirs questionnaire and request filing of any outstanding tax returns. FAN can only verify if all current tax returns have been filed or if any recent taxes are still outstanding.
6 – Payment of taxes to Canada on the German Pension does NOT exempt the pensioner from having to pay taxes to Germany on his German pension. Nonpayment of outstanding taxes is classified as TAX EVASION and NOT TAX AVOIDANCE!
Because of the increasing ages and death of pensioners it is very important for Pensioners, Executors, Heirs, P.O.A and Representatives to make sure NOT ONLY with the Finanzamt Neubrandenburg but ALSO they need to verify with the FAN Collections and Garnishment Dept. that there are no German tax liabilities still outstanding from the deceased pensioner.
FAN is backlogged but they also know that there is no statute of limitation on the taxes owing. They will invoke Article 27 Assistance in Collection from Canada.
Canada also has Section 160 which states – Heirs can be held responsible for tax debt of the deceased.
All in a day’s work:
Many German Pension Recipients are paying unnecessary high taxes to Germany by providing improper documentation. I would like to explain that in more detail with an example from my office. Here is what happened:
A German Pension Recipient, I had analyzed as qualifying for the unlimited tax liability, was extremely upset when he received his notifications (“Bescheids”). It showed him owing taxes of 5,900 Euros on his 40,000 Euro pension for 3 years. I asked him what he had done and it turned out that he had submitted his CRA Notice of Assessment. I quickly filed an objection, provided the proper documentation and he received the new notifications (“Bescheids”) from the German Tax Office showing taxes owing of only 320 Euros on his 40,000 Euro pension for the 3 years.
Here is how Germany determines your tax rate:
Limited tax liability (highest flat tax rate of about 15% on the taxable German pension)
Unlimited tax liability (lowest tax rate 0% to about 5% on the taxable German pension)
As a latest development the German Tax Office is now sending German pension recipients living in Canada a letter stating that they will be sending them Tax Assessments in about 2 months time. At the same time they are making the pensioner aware of the option to be taxed at the lowest tax rate. The German Tax Office has also included an English version which in part states:
Application for treatment to unlimited tax liability
For your application to be granted, you must submit confirmation using the tax notices (Income Tax Return Information Regular or Tax Return Summary).
Most pensioners are sending the Notice of Assessment Summary page from CRA to Germany showing Line 150. This is insufficient information for the German Tax Office to calculate if they qualify. In turn the German Tax Office informs the pensioner that due to insufficient information they are assessing them at the highest tax rate. If the pensioner disagrees with the assessment they still have 2 months from the date of the notification (“Bescheid”) to file an objection. Thereafter there is no recourse and they have to pay the assessed tax amount even if they are assessed in the incorrect tax category. If the German Tax Office is not able to evaluate line 101 to 146 they will be entitled to charge the taxpayer the highest tax rate allowable on their German pension. Many pensioners, tax preparers and accountants feel that the German Tax Office is unreasonable. But it is no different than close to home. If you ask CRA how much you have to pay in taxes when your income as per Line 150 is $25,000, they will definitely not be able to tell you the true tax amount payable. They will also need to see line 101 to 146 to analyze what type of income it is in order to be able to assess the proper tax rate on the $25,000.
The onus is on the taxpayer to provide the proper documentation so as to be assessed at the correct tax rate.
Welcome to Global Taxation!
The German Tax Office (Finanzamt Neubrandenburg) has started sending out Notices (Vollstreckungsankündigung) to those Pension Recipients living in Canada who never responded or paid their taxes as requested (Bescheid) to Germany starting as of 2005.
These Notices show all the amounts and the years delinquent along with a monthly .5% late fee applied. The pensioner is requested to pay all amounts within a couple of months or to apply arranging for a payment schedule. (Stundung)
To guarantee collection of taxes the German Tax Office has been given the power to invoke a withholding tax (Anordnung des Steuerabzugs) to be taken from the pension of confirmed non compliant pensioners. This is only possible for future years and the pensioner is still responsible for paying his tax obligations for all prior years.
For those pensioners who fail to respond or pay their tax obligations their file will be forwarded on to the Garnishment Office (Pfändungs-und Einziehungsverfügung).
This Department has the possibility to seize the pensioner’s German Assets and/or invoke Article 27 of the Tax Treaty and ask Canada for Assistance in Collection.