22 December 1993 Administrative Letter 9316286 F - Is the Clawback of OAS an Income or Profits Tax (7793-5)

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.

Provincial and InternationalRulings Directorate Relations Division

Attention:  E.E. Campbell A\Director

Part I.2 Tax and the Canada-U.S. Income Tax Convention

This is in response to your memorandum of June 1, 1993 wherein you requested our views concerning section 180.2 (Part I.2) of the Income Tax Act (the "Act") in the following fact situation concerning XXXXXXXXXX (the "taxpayer"), who has requested Competent Authority consideration in respect to the following set of facts.

The taxpayer is a Canadian resident and U.S. citizen who is in receipt of U.S. social security benefits and the Canadian Old Age Security pension in 1991.

Pursuant to subparagraph 56(1)(a)(i) of the Act the taxpayer is required to include the total amount of the U.S. social security benefits she receives in income. In accordance with paragraph 5(b) of Article XVIII of the Canada-U.S. Income Tax Convention (the "Convention"), the taxpayer is exempt from tax in Canada on one-half of the total amount of the U.S. social security benefits. As a result, in accordance with subparagraph 110(1)(f)(i) of the Act, the taxpayer is permitted a deduction in computing taxable income equal to one-half of the total amount of U.S. social security benefits received . Accordingly, the taxpayer has been subject to tax under Part I of the Act on only one-half of her U.S. social security benefits.

Section 180.2 of the Act provides for a tax ("clawback") of old age security benefits and, for taxation years before 1993, family allowance benefits where the individual's income is in excess of $50,000.

Section 180.2 imposes a tax on every individual for each taxation year equal to the lesser of:

(a)     the net amount of benefits received under the Old Age Security Act or, for taxation years before 1993, family allowance under the Family Allowances Act, and

(b)     15% of net income in excess of $50,000 (indexed after 1988).

In the determination of the taxpayer's liability under section 180.2, the total amount of the U.S. social security benefits are included in the calculation of income for purposes of determining what portion of the benefits under the Canadian Old Age Security Act and Family Allowances Act (specified benefits) which are required to be repaid to the Government of Canada. The Technical Notes issued with the implementation of the legislation clearly indicates that the "clawback" imposed under section 180.2 of the Act will provide for a repayment by the individual of all or a portion of the specified benefits in the event that the individual's income exceeds $51,765 in 1991. It is our view that the tax imposed under Part I.2 is not a tax on the exempt portion of the U.S. social security benefits. Such benefits are merely taken into account in determining what portion of the specified benefits which must be repaid to the Government of Canada. The tax imposed under section 180.2 is clearly a tax on Canadian source income (i.e. a clawback of Canadian social security benefits) and should not be construed as a tax on the foreign income.

Alternatively, it may be argued that paragraph 2(a) of Article II (Taxes Covered) of the Convention clearly indicates that Part I.2 of the Act is not a tax specifically covered under the Convention. In addition, it is our view that the "clawback" would not qualify as "any identical or substantially similar tax on income" referred to in paragraph 3(b) of Article II of the Convention since it is merely a repayment of the special benefits received from the government as opposed to a tax on income. As a result, it is arguable that Part I.2 tax is not covered by the Convention.

We would add that the above alternative argument is only a supporting argument. If a different treaty was involved and the Part I.2 tax was covered by that treaty we would still rely on our initial position that the Part I.2 tax is a repayment of Canadian social security benefits and not a tax on foreign income.

We trust these comments are adequate for your purposes.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch