Canadian Taxation: Electing to File a Section 217 Tax Return for Pension Income
by George Gonzalez
A separate article in these web pages discusses the taxation of Canadian government pension benefits. As explained there, a non-resident is taxed on Canada Pension Plan (CPP) and Old Age Security (OAS) pension payments via a withholding tax of 25% (or, if applicable, a lower rate under a tax treaty between Canada and the country of residence). Payments from other retirement vehicles, such as withdrawals from RRSPs and RRIFs, are similarly subject to the non-resident withholding tax.
An important point made in the aforementioned article is that, in lieu of paying the withholding tax, a non-resident may elect to pay tax on pension income through the filing of a special income tax return. Conceptually it seems straightforward: prepare a tax return like the type of return that residents file, and pay tax based on the progressive tax brackets rather than a flat withholding tax rate. While the concept is simple, however, the mechanics can be confusing and not all that straightforward.
This article discusses the mechanics of making the election to pay tax on pension income, whether government and private pension income, based on a tax return rather than through the non-resident withholding tax.
The election discussed in this article is applicable to pension income only. While there are special elections available for a few other specific types of income received by a non-resident (e.g., the Section 216 election for rental property income), not all types of non-resident income that are subject to withholding have this type of election available.
For income subject to withholding with no such election available, there is no choice but to pay tax via the withholding route. Also noteworthy is that some types of income received by a non-resident are not subject withholding but must be declared in a tax return and tax paid thereon in that way.
Section 217 Election Filing Mechanics
The special tax return that a non-resident may elect to file for pension income is referred to as a Section 217 tax return. The lead form that is used is the T1 form called the “Income Tax and Benefit Return for Non-Residents and Deemed Residents of Canada”, which the Canada Revenue Agency (CRA) refers to as Form 5013-R. In addition to this T1 form, a few special schedules make up the Section 217 return:
- Schedule A (Statement of World Income)
- Schedule B (Allowable Amount of Federal Non-Refundable Tax Credits)
- Schedule C (Electing Under Section 217 of the Income Tax Act)
In Schedule A, all of the taxpayer’s world income, from both Canadian sources and foreign sources, is entered. The information in Schedule A is used for calculations in other parts of the return. Schedule B is used to arrive at the percentage of world income that is taxable pension income, and calculates allowable non-refundable tax credits.
Schedule C has two parts. In Part 1 the pension income for which the Section 217 election is being made is entered. The withholding tax rate and the withholding tax that was required to have been withheld on that income is also entered in this part of Schedule C. In Part 2, a calculation is made that is called the “Section 217 tax adjustment”. This amount flows through to the main T1 form and serves to reduce the tax that is calculated there.
In simplified terms, the steps for calculating the tax in the Section 217 tax return are:
- Pension income from all sources (CPP, OAS, RRSP withdrawals, RRIF withdrawals, etc.) are entered in the T1.
- Tax is calculated on world income, using the progressive tax brackets, as if all of it was Canadian-source income.
- Schedules A, B and C are completed to arrive at the Section 217 tax adjustment in Schedule C.
- The Section 217 tax adjustment from Schedule C is entered in the latter part of the T1 form, serving to reduce the tax that had been calculated in step 2 above. The result is a tax amount that represents the tax payable on pension income only.
Your Section 217 tax return must be filed with the CRA no later than June 30 after the year for which you are filing the return. As with a normal tax return, if you have a balance owing for the year, you will need to pay the amount owed on or before April 30 to avoid interest charges.
A Section 217 tax return that is filed after the June 30 deadline will not be accepted by the CRA. In this case the CRA will consider the amounts withheld from your pension income to be your final tax obligation to them, unless the payer(s) of your pension income withheld less than the required amount of withholding tax, in which case the CRA will send you a notice of assessment for the difference.
The June 30 deadline is nice since it allows extra time, beyond April 30, to determine whether filing a Section 217 tax return is beneficial, and whether you would want to file this optional return.
CRA Processing of the Section 217 Tax Return
Upon receiving your return, the CRA will review it to determine, first, if electing under Section 217 is in fact beneficial for you. That is to say, they will determine if your final tax liability under Section 217 is less than the amount of the required withholding tax on your pension income. If the CRA determines that the Section 217 election is not beneficial for you, they will not accept your election, and your final tax liability will be based on your withholding tax requirements.
If the CRA determines that the Section 217 election is beneficial for you, they will accept your election, process your return, and accept the tax amount calculated in your Section 217 tax return as your final tax for the year. They will compare this tax amount to the amount of withholding tax that was paid on your pension income during the year, and refund the excess amounts withheld to you.
For example, assume these facts:
- Your total pension income was $20,000.
- Your Section 217 tax return shows a tax of $3,500 on that income.
- Taxes withheld during the year on your pension income totaled $5,000.
- The excess amounts withheld were, accordingly, $5,000 – $3,500 = $1,500. This is the amount that the CRA will refund you.
Adjusting the Amount Withheld on Your Pension Income
You might think to yourself: it’s nice that I will pay less tax under a Section 217 tax return than under tax withholding, and that the CRA will refund the excess amounts withheld; however, I would prefer to pay less withholding tax throughout the year to begin with.
If you are thinking this, then you may want to apply to the CRA to have your future annual tax withholdings reduced so that they match, or come close to matching, the amount that would be paid under a Section 217 tax return. The CRA form for this is Form NR5 (Application by a Non‑Resident of Canada for a Reduction in the Amount of Non‑Resident Tax Required to be Withheld).
If your NR5 application is accepted, the CRA will notify the payer(s) of your pension income to reduce the withholding tax rate on your pension payments. As an end-result, there will be little or no excess tax paid through withholdings, and you will have use of more of your funds during the year, which, of course, would be preferable to having those funds tied up in withholdings remitted to the CRA.
Form NR5 must be filed on or before October 1 of year preceding the year to which the adjusted withholdings will apply, or before the first withholding tax is due to the CRA. The CRA will review your completed Form NR5 to determine if a Section 217 election will benefit you. If it would be beneficial, the CRA will authorize your Canadian payer(s) to reduce the amount of non‑resident tax withheld from your pension payments.
An approved Form NR5 is valid for five tax years. After that you need to file a new Form NR5 with the CRA for another five-year period. However, if your situation changes during any five-year period, you are obligated to file a new Form NR5 then.
An approved NR5 application does not change the need to file a Section 217 tax return. You will still need to file the return for each year in the approval period. As mentioned, though, it would be to your benefit to file the Section 217 return as you would have use of more of your funds during the year rather than having them tied up in withholdings remitted to the CRA.
Determining If a Section 217 Election Would Be Worthwhile
To determine for yourself whether electing under Section 217 would be beneficial, the only way to know for sure is to actually prepare a draft Section 217 tax return and compare the tax on the return to the amount of tax you pay during the year through withholdings. However, a general preliminary analysis may be useful as an initial indication.
First ask yourself the question: what is the current withholding tax rate on my pension income? If you reside in a non-treaty country such as Belize, Costa Rica or Panama, the answer would be 25%. If you reside in a treaty country such as Brazil, Mexico, or Portugal, the withholding tax rate would be less than 25%, typically 15% although you would need to check the specific tax treaty to confirm the rate.
Then ask yourself: in which tax bracket would I fall if the only income that I had was my pension income and I was still resident in Canada? If the answer to this question is, for example, the lowest tax bracket (15%) then a Section 217 election would almost certainly be beneficial if you reside in a non-treaty country and pay a 25% withholding tax. If you reside in a treaty country for which the withholding tax rate is 15% or some other rate less than 25%, a Section 217 election may still be beneficial depending on your circumstances.
If you are in the highest tax bracket (33%) then it is unlikely that you would benefit from filing a Section 217 tax return. If your tax bracket is in between the lowest (15%) and the highest (33%) brackets, i.e., 20.5%, 26% or 29%, then comparing your tax bracket rate to your withholding tax rate may give you a rough indication. However, you would probably want to go through an actual Section 217 tax return calculation as there can be many variables involved. It may very well be beneficial for you to elect under Section 217 even if on initial glance it may not seem so.
If you receive, or will be receiving, government pension income (CPP, OAS) and/or private pension income (RRSP withdrawals, RRIF withdrawals, etc.) and you are currently a non-resident, or plan to become one in the future, consider whether you should elect under Section 217. It would behoove you to determine if you would pay less tax on your pension income by filing a Section 217 tax return than by paying through the withholding tax, and act accordingly.
If you determine that a Section 217 election would be beneficial, you should file a Section 217 tax return to get a refund on excess tax withheld. Additionally, it is recommended that you file a Form NR5 to have the amount of tax withheld from your pension income reduced. This would result in your having use of more of your funds during the year rather than having those funds tied up in withholdings remitted to the CRA.
1 Tax rates for the five progressive tax brackets are 15%, 20.5%, 26%, 29% and 33%.
2 One notable type of income for which no special election is available, and tax must be paid through withholding, for example, is dividend income.
3 Employment income from a Canadian employer and self-employed income from a Canadian business are two examples of this type of income,
4 The name is derived from the technical tax language “electing under Section 217 of the Income Tax Act”.
5 For example, assume a non-resident taxpayer who is a resident of a non-treaty country and received $20,000 in pension income during the year. The withholding tax rate entered in Part 1 would be 25%, and the required tax would be $20,000 x 25% = $5,000. The payer of the pension income may or may not have withheld the correct amount of $5,000. For purposes of the calculations in Part 1 of Schedule, the required withholding amount is calculated and entered (versus the actual amount withheld), and the CRA uses this information in processing the Section 217 tax return.
6 Assuming that the tax is correctly calculated. If it is not, the CRA would calculate the correct tax amount and notify you of this correction.
7 Withholding taxes would have been withheld by the payers of your pension income and remitted to the CRA, and the CRA will therefore have this information on record.