What has happened with those German pensions?
The German pension system has had several reforms. There are also a couple different kinds of German pensions.
For example, one version is called a compensation pension, which is totally tax free. This kind of pension is paid to those adversely affected by the Second World War.
The pension that I want to discuss in this column is the occupational pension plan—sometimes called the worker’s pension plan.
The first pension reform was in 1992 bringing in the regulating of the pension funds, pension firms and insurance companies. This reform tied the pension benefits to the net wages rather than to the gross wages.
The reform in 2001 introduced the personal pension savings arrangement, which was the result of the realization that government pension plans were not secure nor enough to guarantee a quality standard of living after retirement if the pensioner’s only income was the government pension income.
In 2003, the Pension Insurance Sustainability Act was enacted, which did away with pensions that increased over time and eliminated incentives to take early pensions.
The reform in 2004 addressed the taxation of health plans and the inequality of the taxation of social pensions versus civil servant pensions.
In 2005, the taxation rules for German pensions changed again. This time, anyone that was receiving a pension in 2005 or before would have 50 per cent of it taxable and the other 50 per cent tax free.
Then if your pension was due to start in 2006, 52 per cent would be taxable and 48 per cent would be tax free and so on until the year 2020.
In 2021, the taxable portion would increase by one per cent a year and after 2040, the entire pension would be taxable.
The non-taxable portion of the pension would be the same year after year until the year of death.
The pension was normally transferred to the pensioner’s bank account on a monthly or quarterly basis and converted into Canadian funds at that time, however, it is actually required to be converted using the average annual exchange rate for the Euro.
Our tax treaty with Germany indicates that the pension income received by German pensioners while in Canada will be taxed by Canada at the same rate that it would have been taxed had the pensioner stayed in Canada.
In 2010, many German pensioners living in Canada began receiving letters from the German government requiring the filing of German tax returns for their pensions beginning in 2005.
At first, the letters and the documentation were very difficult to understand. Finding the correct forms to file on the German Tax website was almost impossible because there was not a form provided for a pensioner, nor a non-resident.
I guess after many hundreds of calls and emails to the German Tax Authorities (Finanzamt) in Neubrandenburg, the letters that I see now are much better and hold much more information and explanation.
The forms are now available on the website www.formulare-bfinv.de but in the German language only. The forms that you will need are one called ESt 1 C-Einkommensteuererklarung fur beschrankt Steuerpflichtige.
On this form, fill out lines 1 through 16 and sign on the last page.
The next form you will need is called Anlage R. Fill out lines 1 through 7 and add your yearly reassessment of the pension (Rentenanpassungsmitteilung) for this year.
You will need to fill out these forms for each year, due by April 30.
Since the taxpayer doesn’t actually compute the taxes owing on the return, each year will need a T1Adjustment to the Canadian return after the assessment has been received from Germany.
Now, with the German government requiring the filing and payment of the taxes to Germany, there arises a double taxation issue.
It is up to Canada to eliminate the double taxation per Article 23 of the treaty.
The resolution is to pay the tax to Germany and then complete, or have your accountant complete, a T1 Adjustment form to receive a tax credit for the taxes paid to the German government.
On a T1 Adjustment, you list the line of the tax return that is being adjusted, the original amount, the adjusted amount and the amount of the adjustment.
If an adjustment to one line affects another line on the tax return, then all lines that would be affected by this adjustment need to be listed and adjusted on the T1 Adjustment form.
Unfortunately, the Foreign Tax Credit here in Canada is not a dollar for dollar reimbursement, but rather a credit against your Canadian taxes based on the lessor of the actual foreign taxes paid or the Canadian tax that would have been payable on the foreign non-business income.
There is both a federal foreign tax credit and a provincial credit. (We are assuming that pensioners do not have any foreign business income for the purposes of this column.)
Another problem with having to submit a T1 Adjustment is that one must be submitted for each year that you want adjusted.
If you are paying a fee for each T1 Adjustment, it just might not be worth the refund of the tax after you pay the fee for the calculations.
Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.