I receive Canada Pension Plan and Old Age Security payments, plus a private Canadian employer pension -- which of these can I subtract from my Illinois income as retirement income?

Plain-English summary

A married couple filed a joint 2024 Illinois return and subtracted six items of Canadian-sourced retirement income from their total: Canada Pension Plan benefits for each spouse, Canadian Old Age Security (OAS) for each spouse, and a private Canadian employer pension (split into two reporting items). Illinois denied the subtraction because the income didn't appear on the specific federal 1040 lines (4b, 5b, or 6b) the Department's instructions reference -- it had instead been reported on Schedule 1116 and Schedule 1. The couple asked which, if any, of the six items actually qualify.

Illinois doesn't independently classify foreign pensions -- it follows federal characterization. Whether a payment is subtracted from Illinois income depends entirely on how it's treated federally, which in turn depends on how it's categorized under the relevant tax treaty and the Internal Revenue Code. The Department is explicit that interpreting international treaties and federal tax law "is not a determination made by the Illinois Department of Revenue."

The private employer pension does not qualify. Illinois's retirement-income subtraction (35 ILCS 5/203(a)(2)(F)) only covers amounts included in federal income under specific Internal Revenue Code sections (402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408) -- provisions built around U.S.-organized qualified employee trusts, annuities, and IRAs. A private pension paid directly by a Canadian employer doesn't fit within that framework, so it is not eligible for the (F) subtraction.

Canada Pension Plan and Old Age Security may be different. These programs are government benefit programs (not a private employer plan), created and funded under Canadian federal legislation. Under the U.S.-Canada tax treaty, Article XVIII's paragraph 5 addresses benefits under each country's "social security legislation" -- and the Department noted CPP and OAS "appear" analogous to U.S. Social Security. Illinois has a SEPARATE subtraction, 35 ILCS 5/203(a)(2)(L), for Social Security and railroad retirement benefits tied to IRC §§ 72(r) and 86 -- so if CPP/OAS payments are federally treated the way U.S. Social Security is treated under the treaty, they could potentially qualify for that different subtraction. The Department stopped short of a definitive conclusion, since that federal/treaty characterization isn't something Illinois decides itself.

What this means for you

Retirees receiving Canadian retirement income while living in Illinois

Don't assume all "Canadian pension" income is treated the same way. A private employer pension from Canada is unlikely to qualify for Illinois's general retirement-income subtraction, because that subtraction is keyed to specific U.S. retirement-plan Code sections a foreign private plan won't satisfy. Canada Pension Plan and Old Age Security, by contrast, may be treated more like Social Security and could potentially qualify for Illinois's separate Social Security subtraction -- but confirm the federal/treaty treatment first, since that's what actually controls.

Accountants preparing returns with foreign pension income

Start with how the income is federally characterized and reported (which specific 1040/Schedule lines, and under which treaty provision), since Illinois's subtraction eligibility rides entirely on that federal answer. Don't rely on the Department to independently resolve treaty interpretation questions -- it has stated plainly that this isn't its role.

Anyone with retirement income from a country other than Canada

The Department's reasoning here (federal characterization controls; only specific IRC sections qualify for the general retirement subtraction; government social-security-equivalent programs may separately qualify) reflects a general approach the Department applies across countries, not something unique to Canada.

Common questions

Q: Does Illinois decide whether my foreign pension is taxable based on the tax treaty?
A: No -- Illinois follows how the payment is treated federally (under the applicable treaty and the Internal Revenue Code); it does not independently interpret international tax treaties.

Q: Can I subtract a private Canadian employer pension from my Illinois income?
A: Generally no -- Illinois's retirement-income subtraction under 35 ILCS 5/203(a)(2)(F) is tied to specific IRC sections (402-408) governing U.S.-organized retirement plans, and a private Canadian employer pension doesn't fit that framework.

Q: What about Canada Pension Plan or Old Age Security payments?
A: These may be treated as analogous to U.S. Social Security under the U.S.-Canada treaty, which could make them eligible for Illinois's separate Social Security subtraction (35 ILCS 5/203(a)(2)(L)) rather than the general retirement-income subtraction -- but this depends on federal/treaty characterization.

Q: Why was my subtraction denied even though I reported the income?
A: The Department noted the income didn't appear on the specific federal return lines its instructions reference (Form 1040, lines 4b/5b/6b), since it was instead reported via Schedule 1116 and Schedule 1 -- consistent federal reporting in the expected format matters for the Illinois subtraction to apply.

Citations and references

Statutes and treaty provisions:

• 35 ILCS 5/203(a)(2)(F) (retirement-income subtraction tied to IRC §§ 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), 408)
• 35 ILCS 5/203(a)(2)(L) (Social Security/railroad retirement subtraction tied to IRC §§ 72(r), 86)
• Convention Between the United States and Canada with Respect to Taxes on Income and on Capital (1980, as amended), Article XVIII (pensions and annuities) and paragraph 5 (social security benefits)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2026.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2026/it26-0003-gil.pdf

Original ruling text

IT 26-0003-GIL 04/01/2026 RETIREMENT INCOME
Canada Pension Payment/Canadian Old Age Supplement and private pension
treatment under U.S.-Canada treaty, federal law and Illinois tax law including 35
ILCS § 203(a)(2)(F). Treatment of Canada Pension Payment/Canadian Old Age
Supplement may be analogous to treatment of U.S. Social Security. (This is a
GIL).
April 1, 2026
NAME
ADDRESS
EMAIL
RE: Tax Deduction for Canadian sourced pension
Dear NAME:
This letter is in response to your letter dated September 5, 2025, in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer inquiries
concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding on the Department, but only as to the taxpayer who is the subject of the request for
ruling and only to the extent the facts recited in the PLR are correct and complete. Persons
seeking PLRs must comply with the procedures for PLRs found in the Department’s
regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department
policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may
access our website at to review regulations, letter rulings and other types of information
relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL.
INQUIRY:
We filed our joint 2024 Illinois tax return and claimed a deduction of Canadian
sourced pension income from our total income. The deduction was denied since
the source of this income did not appear on lines 4B, 5B or 6B of our federal 1040.
The Canadian sourced income was recorded on Schedule 116 of our federal return
and reported on Schedule 1 of that return. The income is comprised of six (6)
separate items; Canada Pension income for myself and my wife (2), Canadian Old
Age Supplement for myself and my wife (2) and finally pension income from my
Canadian employer (COMPANY) broken up into two separate items. I submitted

NAME
Page 2
April 1, 2026

documentation (Canadian NR4 forms) for each item to the Illinois Department of
Revenue to confirm their authenticity.
Please provide a Letter of Ruling to clarify which of these Canadian sourced items
are eligible as ‘Qualified Pension Income’ and thus allowable as deductions from
our State of Illinois income. I appreciate your attention to this matter.
DEPARTMENT’S RESPONSE:
35 ILCS § 203(a)(2)(F) provides a subtraction modification for retirement income as
follows:
(F) An amount equal to all amounts included in such total pursuant to
the provisions of Sections 402(a), 402(c), 403(a), 403(b), 406(a),
407(a), and 408 of the Internal Revenue Code or included in such total
as distributions under the provisions of any retirement or disability plan
for employees of any governmental agency or unit, or retirement
payments to retired partners, which payments are excluded in
computing net earnings from self-employment by Section 1402 of the
Internal Revenue Code and regulations adopted pursuant thereto;
26 USC §§401-408 address various concerns connected with taxation of employee trusts,
exemptions, annuities, employee benefit plans for the benefit of overseas employees of
affiliates of the employer who created that plan, and individual retirement accounts.
None of these provisions appear to apply to a retirement plan of a private employer in
Canada, and the pension income would therefore not qualify for subtraction under IITA
Section 203(a)(2)(F).
The Convention between the United States of America and Canada with Respect to Taxes
on Income and Capital, signed at Washington on September 26, 1980 (including
subsequent protocols), appears to be the relevant treaty between Canada and the United
States.
Article XVIII, Pensions and Annuities, as amended, provides as follows:
*
*
*
(3) For the purposes of this Convention, the term ‘pensions’ includes any payment
under a superannuation, pension or other retirement arrangement, Armed Forces
retirement pay, war veterans pensions and allowances and amounts paid under a
sickness, accident or disability plan but does not include payments under an
income-averaging annuity contract or, except for the purposes of Article XIX
(Government Service), any benefit referred to in paragraph 5.
*

*

*

NAME
Page 3
April 1, 2026

(5) Benefits under the social security legislation in a Contracting State (including
tier 1 railroad retirement benefits but not including unemployment benefits)
paid to a resident of the other Contracting State shall be taxable only in that
other State, subject to the following conditions:
(a) a benefit under the social security legislation in the United States paid
to a resident of Canada shall be taxable in Canada as though it were a
benefit under the Canada Pension Plan, except that 15 per cent of the
amount of the benefit shall be exempt from Canadian tax; and
(b) a benefit under the social security legislation in Canada paid to a
resident of the United States shall be taxable in the United States as
though it were a benefit under the Social Security Act, except that a type
of benefit that is not subject to Canadian tax when paid to the residents
of Canada shall be exempt from United States tax.
Article XVIII, Paragraph 3, of the Treaty defines the term “pension.” The definition is
broad and includes “…includes any payment under a superannuation, pension or other
retirement arrangement, Armed Forces retirement pay, war veterans pensions and
allowances and amounts paid under a sickness, accident or disability plan but does not
include payments under an income-averaging annuity contract or, except for the purposes
of Article XIX (Government Service), any benefit referred to in paragraph 5” Article
XVIII, Paragraph 5, appears to cover Social Security and OAS.
The Treasury Department Technical Explanation of the Convention between the United
States of America and Canada with Respect to Taxes on Income and on Capital Signed at
Washington. D.C. on September 26, 1980, as Amended by the Protocol Signed at Ottawa
on June 14, 1983 and the Protocol Signed at Washington on March 28, 1984. General
Effective Date Under Article XXX: 1 January 1985, in discussing Section XVIII of the
Treaty, provides that:
Paragraph 5, as amended by the 1984 Protocol, provides that benefits under social
security legislation in Canada or the United States paid to a resident of the other
Contracting State are taxable only in the State in which the recipient is resident….
If a U.S. citizen and resident receives Canadian social security benefits, Canada
will not tax such benefits and the United States will exempt from tax one-half of
the total amount of such benefits…. Paragraph 5 encompasses benefits paid under
social security legislation of a political subdivision, such as a province of Canada.
Your letter indicates that you are a permanent resident of the State of Illinois. You noted
in that letter that you filed a joint return in 2024 and reported Canadian sourced income on
Schedule 1116 and Schedule 1 including Canadian pensions income for yourself and your
wife, Canadian Old Age Supplement for yourself and your wife, and private pension
income from your previous employment with COMPANY.

NAME
Page 4
April 1, 2026

The determination as to whether or not the various pension payments are subtracted from
AGI in the computation of Illinois base income depends upon how the benefits are treated
federally which in turn depends upon how the benefits are categorized under US-Canadian
treaty and federal tax law. Whether or not a particular pension is subject to international
treaty, or how that payment is to be treated under federal tax law, is not a determination
made by the Illinois Department of Revenue.
Canadian Old Age Security (OAS)(R.S.C. 1985 ch. O-9)/Canadian Pension Plan
(CPP)(R.S.C. 1985 ch. C-8):
Illinois law provides a subtraction modification for Social Security benefits. Federal AGI
is the starting point for Illinois tax calculation, which is then adjusted for subtractions
modifications or additions.
Canadian Old Age Security pension (OAS) appears to be created and governed by the
Old Age Security Act, R.S.C. 1985, Ch. 0-9. This is a benefit payment provided to
persons who meet the criteria provided in the Act. Canadian Pension Plan appears to be
created and governed by R.S.C. 1985 C-8. This is a benefit payment managed by the
Canadian government and funded at least in part by payroll deductions from salary. It
appears that the treaty may apply to these payments and as such they could qualify to be
treated as analogous to U. S. Social Security payments under IRC Section 86.
COMPANY Pension
As for the COMPANY pension, it does not appear that there is a relevant treaty portion
that would apply. This pension would not fit within the framework of code sections 402408 and therefore is not eligible for the subtraction modification under IITA section
203(a)(2)(F).
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,

Javonna Ackerman
Associate Counsel
JA:sc