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). The couple said Illinois denied their subtraction because the income did not appear on federal Form 1040 lines 4b, 5b, or 6b; they said they reported it 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

This letter addresses Canadian payments and the U.S.-Canada treaty. For income from another country, the applicable federal treatment and Illinois subtraction provision would need separate review.

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 couple reported that their subtraction was denied because the income did not appear on Form 1040 lines 4b, 5b, or 6b; they said they reported it on Schedule 1116 and Schedule 1. The Department did not resolve whether changing the reporting lines would establish subtraction eligibility.

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

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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:
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(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.
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(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.

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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
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