German Pensioners

2002 Taxation of Social Security Pension

The tax treaty between Canada and Germany governs how the social security pension will be taxed in Germany and Canada, by Canadian Residents. Under the prior Tax agreement, German social security pensions were not taxable in Canada. However, this has since changed starting in 2003.

“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.” Agreement Between Canada and the Federal Republic of Germany – Canada.ca

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.

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 taxable portion depends on the age of the taxpayer on the date the pension payments first began. Since 2012 (child-rearing years, survivors’ pension, etc.) caused changes to the original 2005 tax-exempt amounts. The 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.

2005 Revision

On January 1, 2005, a new law on taxation of old age pensions (Alterseinkünftegesetz) entered into force. According to this law, pension from the statutory pension insurance (and other forms of pensions) shall be gradually carried over to full taxation. This process will stretch from 2005 until 2040. Depending on the year of the first pension commencement, the tax and revenue office determines the so-called taxation rate of the pension and the fixed tax-exempt amount. The taxation rate identifies the taxable percentage of your pension.

In the case of a pension commencement in 2005 or before the German tax office determines a fixed tax-exempt amount considering a taxation rate of 50 %. The tax-exempt amount is in principle accounted for every year and during the whole retention of the pension payment.

For every new pensioner age group from 2006 onwards the taxation rate rises by two percentage points, and for every pensioner age group from 2021 it rises by one percentage point. Thus, the tax-exempt amount resulting from these declines gradually for every new pensioner age group. For pensioner age groups from the year 2040 100 % of the pension from the statutory pension insurance will be subject to taxation.

Canadian-German Agreement on Double Taxation

The Agreement on Double Taxation between Germany and Canada 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 a resident of 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. Taxes paid in Germany are credited against taxes in Canada to avoid double Taxation.

Exempt Portion of Pension

Canadian taxation is a self-reporting system. CRA conducts manual reviews of a small percentage of the returns filed to make sure that taxpayers were eligible for the deductions and tax credits they claimed and didn’t claim more than they were entitled to.

Claims for the foreign tax credit and exempt portion of pension attract a lot of attention. The CRA will want to make sure that you paid taxes to Germany for the pension, and that you qualified for the exemption. Typically, they’ll want to see your foreign tax return or a letter of assessment from the foreign tax authority confirming your final tax liability. And, if the tax return or letter of assessment is in a foreign language, they’ll want you to provide a certified translation.

CRA Review will sometimes send out letters requesting proof for Line 25600 additional deduction.  You have 30 days to provide the information, otherwise, your taxes will be reassessed, and if the payment is not made, shortly after you will receive a Collections Notice.  Quite often the pensioner complies and ends up paying the Canada Revenue Agency (CRA) requested amount.

If you do not want to pay Canadian taxes on your German pension exempt amount; it is mandatory that you provide CRA your German Tax assessment with an official certified translation, if requested. Contact Merten Financial for more information at 289-723-1484.

Siegfried Merten, MFA