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.
Principal Issues: Whether payments made by a Canadian individual pursuant to the U.S. Railroad Retirement Tax Act are considered to be non-business income taxes for the purposes of the foreign tax credit.
Position: Tier 1 railroad retirement taxes are considered to be non-business income taxes but Tier 2 railroad retirement taxes are not.
Reasons: As provided in paragraph 2 of Article XXIV of the Canada-U.S. tax convention, Canada agreed to give a foreign tax credit for payments, in the case of an individual, of any social security taxes paid to the United States (other than taxes relating to unemployment insurance benefits) on profits, income or gains arising in the United States. In our view, the term "social security taxes" in that convention is broad enough to include Tier 1 railroad retirement taxes but not Tier 2.
XXXXXXXXXX 2005-012547
Sylvie Labarre, CA
October 20, 2006
Dear Madam:
Re: United States Railroad Retirement Tax
This is in reply to your facsimile of April 12, 2005 in which you requested our opinion in respect of the payments made under the Railroad Retirement Tax Act of the United States by a Canadian-resident employee of a Canadian Railway and the foreign tax credit. We apologize for the delay in responding to your facsimile.
The question you have is whether payments made by a Canadian individual pursuant to the U.S. Railroad Retirement Tax Act are considered to be non-business income taxes for the purposes of the foreign tax credit.
As provided in paragraph 2 of Article XXIV of the Canada-U.S. tax convention, Canada has specifically agreed to give a foreign tax credit for payments, in the case of an individual, of any social security taxes paid to the United States (other than taxes relating to unemployment insurance benefits) on such profits, income or gains arising in the United States.
The question is whether the payments made under the Railroad Retirement Tax Act of the United States are social security taxes. The Railroad Retirement Tax Act provides for two levels of taxes or "tiers": Tier 1 and Tier 2. In our view, the term "social security taxes" in the Canada-U.S. tax convention is broad enough to include Tier 1 railroad retirement taxes but it does not include Tier 2 railroad retirement taxes.
Therefore Tier 1 railroad retirement taxes paid by an individual are considered to be non-business income taxes for the purposes of the foreign tax credit. However, under the Income Tax Act, a taxpayer is only entitled to claim a foreign tax credit against Canadian taxes paid on income arising outside of Canada. If the taxpayer has no U.S.-sourced income, no credit for U.S. tax paid on the railroad income is available even if we consider it a social security tax.
We trust the above has been of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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