26 May 1994 Internal T.I. 9336987 - U.S. RAILROAD RETIREMENT ACT (IT-122R2) (4093-U5-100-18)

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 Department.

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

Principal Issues:

Disability Benefits under the U.S. Railroad Retirement Act - Are they benefits under the social security legislation of the U.S. for treaty Purposes

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

Benefits are in lieu of social security benefits.

			May 26, 1994

	Vancouver District Office	Rulings Directorate
P. Clemens	Jim Wilson
	Chief of Appeals	957-8953

	Attention:  Laurie Elias
	Designated Appeals
	Section 431-31
			933698

United States Railroad Retirement Act ("USRRA")

This is in reply to your memorandum of December 10, 1993, in which you requested our comments concerning the tax treatment of disability insurance benefits paid under the USRRA to a Canadian resident. You have also requested an explanation of certain policies outlined in Interpretation Bulletin IT-122R2 ("bulletin") and the application of paragraphs 1 and 5 of Article 18 of the Canada-United States Income Tax Convention ("Convention").

With respect to your first query, we disagree with your view that disability insurance benefits provided under Tier 1 of the USRRA would not constitute "benefits under the social security legislation" of the United States for purposes of paragraph 5 of Article 18 of the Convention. We agree with the position taken in the bulletin that these benefits are "social security benefits" and are subject to paragraph 5 of Article 18 of the Convention. In this regard, we have attached a copy of a letter from the Internal Revenue Service regarding the "merger of the Railroad Retirement Act and the Social Security Act" as well as a letter from the U.S. Railroad Retirement Board regarding disability benefits paid under the USRRA.

As stated in the decision of The Estate of the late John N. Gladden, 1985 DTC 5188 (FCTD), "Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned."

The U.S. social security system underwent significant changes in 1974 to better coordinate the relationship between benefits paid under Title II of the Social Security Act ("SSA") and Tier 1 of the USRRA. It is our understanding that individuals otherwise entitled to disability insurance benefits under Tier 1 of the USRRA will not be entitled to the equivalent benefits under the SSA and therefore, as indicated in paragraph 1 of the bulletin, the portion of Tier 1 benefits considered to be social security benefits is the amount of the social security benefits that a railroad employee or beneficiary would have been entitled to receive if the employee's service had been covered under the SSA.

We should point out that the Department came across a similar situation with the Netherlands whereby a private pension and disability scheme in the Netherlands was already in affect prior to that country's introduction of a national social security scheme and employees of the private scheme, for simplicity, continued to receive benefits under the private scheme as opposed to the new national scheme. In that case, the Department accepted that those benefits received under the private scheme, to the extent that they would have been entitled to equivalent benefits under the national social security scheme, constituted benefits received under the social security legislation of the Netherlands for purposes of paragraph 5 of Article 18 of the Canada-Netherlands Income Tax Convention.

With respect to your other query, you indicate that the Appellant's position is that paragraph 6(1)(f) of the Income Tax Act ("Act") applies to the disability insurance benefits received under the USRRA and that they are exempted by subsection 19(1) of the Income Tax Application Rules ("ITAR"). This issue was taken into consideration during the preparation of the bulletin. It was determined that pension and disability benefits received under the USRRA represents a "superannuation or pension benefit" as defined in subsection 248(1) of the Act and thus are taxable pursuant to subparagraph 56(1)(a)(i) of the Act. Disability insurance benefits paid under the SSA up to the age of 65 are not considered to be income and therefore are not subject to tax in Canada. The reason for the difference is that the latter is paid out of the "Federal Disability Insurance Trust Fund", benefits from which do not meet the definition of a "superannuation or pension benefit". You will note that in the letter from the U.S. Railroad Retirement Board (see attached), they state that "Unlike social security benefits, railroad retirement and disability benefits are paid out of the same fund, the Railroad Retirement Account".

Since disability benefits paid under the SSA up to the age of 65 were not considered a "superannuation or pension benefit", the issue of whether paragraph 6(1)((f) of the Act could apply to such benefits was also taken into consideration. It was decided that paragraph 6(1)(f) of the Act did not apply because, among other reasons, the spirit and object of that provision is intended to deal with those plans or arrangements described in subparagraphs 6(1)(f)(i) to (iii) between employee and employer (see Interpretation Bulletins IT-54 and IT-428) and not a disability scheme created by a national social security statute. If so, what would prevent a Canada Pension Plan disability benefit from falling under this provision? For all intents and purposes a disability benefit provided under Tier 1 of the USRRA is a benefit received under the U.S. national social security system and for the same reason explained above, in addition to the fact that the benefit constitutes a "superannuation or pension benefit", we are of the opinion that these benefits do not fall under paragraph 6(1)(f) of the Act.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch