22 December 2003 External T.I. 2003-0053385 - Foreign Tax Credit FICA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a social security payment to the government of the United States pursuant to the Federal Insurance Contributions Act (FICA) is an "income or profits tax", pursuant to subsection 126(7) of the Act for the purposes of the foreign tax credit in subsection 126(1) of the Act.

Position: A FICA payment is not technically an "income or profits tax" but the CCRA treats it as such because we agreed in the Canada-U.S. Tax Convention to give a foreign tax credit for such a payment.

Reasons: See herein.

XXXXXXXXXX 							Gilles Gosselin
								2003-005338
December 22, 2003

Dear XXXXXXXXXX:

Re: Foreign Tax Credit

We are writing in response to your letter dated December 2, 2003. You ask us to confirm our view, stated in IT-122R2 - United States social security taxes and benefits, paragraph 5, that a social security payment to the government of the United States pursuant to the Federal Insurance Contributions Act (FICA) is an "income or profits tax" pursuant to subsection 126(7) of the Income Tax Act (Canada)(the Act), for the purposes of the foreign tax credit in subsection 126(1) of the Act.

Section 126 of the Act provides for a foreign tax credit for taxes paid to a foreign government. The CCRA states in IT-122R2, paragraph 5, that US social security payments are income taxes that qualify as "non-business-income taxes" for the purposes of the foreign tax credit in paragraph 126(1)(a) of the Act. The CCRA has also confirmed that German and French social security contributions qualify as "non-business-income taxes".

We have recently reviewed the treatment of social security payments as an income or profits tax for the purposes of the foreign tax credit and we concluded that the position in IT-122R2 is not supportable in law because the social security payments reviewed do not qualify as taxes. Consequently, the CCRA is revising its position on this point. As a rule, social security payments will no longer be accepted as non-business income taxes for the purposes of the foreign tax credit. The technical interpretations regarding the tax treatment of social security contributions in France and Germany as foreign tax credits are thus obsolete and unreliable. These changes are effective for the 2004 and subsequent taxation years.

However, pursuant to the Canada-U.S Tax Convention, Canada has specifically agreed to give a foreign tax credit for FICA payments. Accordingly, the CCRA will continue to treat a FICA payment as an "income or profits tax" for the purposes of the foreign tax credit in subsection 126(1) of the Act.

If you have any questions or comments please feel free to contact the writer, Gilles Gosselin, at (613) 946-3553. We trust that our comments will be of assistance to you.

Yours truly,

Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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