12 June 1987 Income Tax Severed Letter 7-1726 - [XXXX]

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.

DATE: June 12, 1987

TO-A Source Deductions Division Non-Resident Section 400 Cumberland, Rm 5000

FROM- Specialty Rulings Directorate M.D. Praulins Tel: 957-2123

ATTENTION A. Watson

RE: Unemployment Insurance Benefits Paid to Non-Residents

This is reply to your memorandum dated April 15, 1987 concerning the amount of withholding tax exigible on payments of Unemployment Insurance benefits ("U.I. benefits") paid to non-residents of Canada who are residents of the United States.

You have asked us for our views on the correct interpretation of the classification of U.I. benefits for purposes of the 1980 Canada-United States Income Tax Convention (the "Convention") and resulting applicable withholding rates on the benefits paid to non-residents. It is assumed forthwith that all references to non-residents are to non-residents of Canada who are residents of the United States.

It is our understanding that the current rate of withholding tax on U.I. benefits paid to non-residents applied by the Unemployment Insurance Commission (the "Commission") is fifteen per cent (15%). However, you note that if U.I. benefits were to be included as benefits under "...the social security legislation..." of Canada as stated in the Convention, withholding tax would be reduced to NIL. Alternatively, if U.I. benefits were not included in any of the provisions of Article XVIII of the Convention you suggest that it may be appropriate to apply a twenty-five per cent (25%) rate of withholding tax pursuant to Part XIII of the Income Tax Act (the "Act") and Article XXII of the Convention.

Our Comments

It is our view that unemployment insurance benefits do not qualify as social security benefits. This is consistent with the Government's view as espoused by the U.I. Commission that these benefits are paid pursuant to an insurance plan and are payable only to participants. Thus, we are of the view that U.I. benefits are subject to twenty-five percent (25%) withholding tax pursuant to paragraph 212(1)(j) of the Act, with no reduction in the rate of withholding tax provided for in the Convention.

Furthermore, according to the Provincial and International Relations Division, the intent of the treaty negotiators was to include the term "social security" in paragraph 5 of Article XVIII and to apply it in a narrow sense. It was intended to apply only to the type of benefits payable by the U.S. under the Social Security Act, as opposed to giving the term a broad dictionary meaning. The U.S. does not provide unemployment compensation benefits under its social security legislation and therefore, unemployment insurance benefits paid in Canada were not intended to be included as "benefits under the social security legislation" in paragraph 5 of Article XVIII of the Convention. The view of the Provincial and International Relations Division is shared by the IRS representatives in Ottawa, who were contacted as a result of our inquiries.

While our above comments are directed to periodic benefits payable to an individual in respect to his unemployment, we understand that sickness benefits are also payable. If this is so, and such benefits are payable on a periodic basis it would appear that they may qualify as a pension in Article XVIII(3) for the reduced rate of withholding pursuant to Article XVIII(2) of the Convention.

We also understand that the Unemployment Insurance Act provides for a lump sum retirement benefit at age sixty-five. As it does not appear to be paid on a periodic basis there would appear to be no relief from the 25% rate of withholding tax.

Should there be any other type of benefits payable pursuant to the Unemployment Insurance Act we would have to deal with each on a case by case basis.

Finally, in closing, we note that when a non-resident is in receipt of paragraph 212(1)(j) amounts, he is entitled to file an election in accordance with section 217 of the Act. Thus, for a non-resident who has been a commuter employee in Canada in the year, such an election would simply mean that his Canadian employment income and his 212(1)(j) receipts in a particular year would be merged into one return.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch