1993 External T.I. 9332815 F - Clawback of Old Age Security Benefits (7200-1)

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.

933281 XXXXXXXXXX

December 9, 1993

Dear XXXXXXXXXX

RE:  Clawback of benefits provided under the Old Age Security Act

This is in reply to your letter of November 2, 1993 concerning the repayment of Old Age Security benefits ("clawback") received under the Old Age Security Act when an individual's income is in excess of a base amount.

It is our understanding that you are a Canadian resident in receipt of both pension benefits paid under the Canadian Old Age Security Act and pension benefits paid under the U. S. social security system. You indicated that because the deduction provided under paragraph 5 of Article XVIII of the Canada-U.S. Income Tax Convention (the "Convention"), which is equal to 50% of the U.S. social security payments received, is not deducted in computing your net income, your income will be in excess of the clawback amount and therefore your U.S. social security benefits will be fully taxed in the clawback calculation since 100% of your U.S. social security benefits are included in that calculation. You have suggested that the matter could easily be solved by reporting the 50% deduction (on line 232 of the T1 General Income Tax Return) in computing net income rather than in computing taxable income (on line 256 of that Return).

The Canadian Income Tax Act (the "Act") requires that the deduction provided under the Convention, equal to 50% of the U.S. social security payments received by you, is only deductible for purposes of the Act in computing taxable income, therefore the deduction provided under the Convention is required to be taken on line 256 rather than line 232 of the T1 General .

The clawback is a separate tax imposed under the Act on Old Age Security benefits. For each taxation year it is 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)

The Technical Notes prepared by the Department of Finance and issued with respect to the legislation (outlined immediately above) implementing the clawback of the Old Age Security benefits indicated that such tax constitutes a repayment by the individual of all or a portion of the those benefits where that individual's income exceeds the base amount ($53,215 in 1992). Even if considered as an income tax, the tax imposed on the Old Age Security benefits is a tax imposed only on Canadian source income (i.e. on Canadian Old Age Security benefits). Even though income received by an individual from other sources, such as U.S. social security benefits, U.S. interest and Canadian dividends etc., is included in his income for purposes of the clawback, any required repayment of the benefits provided under the Old Age Security Act in a particular year is not a tax on income from those other sources.

The Act also imposes a separate tax on all sources of income including the balance of the Old Age Security benefits, if any, after the clawback. In the calculation of taxable income for these purposes, an individual who is in receipt of U.S. social security benefits is granted a deduction equal to 50% of such benefits in order to comply with the terms of the Convention. As a result, such an individual is only taxed in Canada on 50% of his U.S. social security benefits.

In summary, the tax imposed under the clawback provision of the Act is a tax imposed on Canadian source income and is not a tax on U.S. social security benefits in spite of the fact that 100% of such benefits is taken into account in calculating the base amount for the purposes of determining the portion of the Old Age Security benefits which must be repaid.

We trust the above comments adequately explains the Department's position.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch