13 February 1998 Income Tax Severed Letter 9731757 - Subsection 20(12) and United States social security tax

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.

SUMMARY: Subsection 20(12) and United States social security tax—ITA-20(12)—Application of subsection 20(12) to a particular taxpayer situation where the taxpayer files income tax returns in the United States and Canada and pays US social security tax. Also, whether to make contributions to the Canada Pension Plan or the Quebec Pension Plan.

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.

April 29, 1998

Jennifer Gilmour Enquiries & Adjustments David R. Senécal International Tax Services Office International Section Tel: (613) 957-9796

973175

Subsection 20(12) of the Income Tax Act (the “Act”)

This is in reply to your memorandum of December 1, 1997, wherein you request our comments regarding the application of subsection 20(12) of the Act in the following factual situation:

* The taxpayer is an individual who was a deemed resident of Canada in 1995 and 1996 by virtue of having sojourned here for more than 183 days in each of those years. The taxpayer is a resident of the U.S. for the purposes of the Internal Revenue Code as well as being a resident of that country for the purposes of the Canada-U.S. Income Tax Convention (the “Convention”) pursuant to the tie-breaker rules in Article IV of the Convention. * During the years in question the taxpayer's income from self-employment was earned entirely in the province of Quebec. The taxpayer did not contribute to the Quebec Pension Plan in either year claiming that he was required to contribute to the U.S. Social Security System in those years by virtue of his being a resident of the U.S. (rather than on the basis of being a U.S. citizen which he was).

The taxpayer filed Canadian tax returns for 1995 and 1996 claiming a foreign tax credit for the U.S. Social Security paid with respect to his Canadian source self-employment income. You have disallowed the foreign tax credit on the basis that the taxpayer had no foreign source income. The taxpayer has responded by requesting that he be allowed to deduct the taxes from his income puruant to subsection 20(12) of the Act on the basis that the definition of “non-business-income tax” in subsection 126(7) of the Act does not stipulate that the tax must be paid in respect of a business carried on outside of Canada. The taxpayer is also arguing that the exclusion in paragraph (d) of that definition, which applies to a tax that would not have been payable had the taxpayer not been a citizen of the U.S. and that cannot reasonably be regarded as attributable to income from a source outside Canada, does not apply because the social security tax was payable by virtue of his being a resident of the U.S. rather than because he was a citizen of that country.

Comments

It is our understanding that one must look to Chapter 2 of the U.S. Internal Revenue Code (the “Code”) - Tax on Self-Employment Income (“TSI”) in order to determine whether an individual is required to contribute to the U.S. social security system with respect to any self-employment income earned by that individual. Pursuant to Code section 1402(b), self-employment income for purposes of the TSI means the “net earnings from self-employment derived by an individual (other than a non-resident alien individual, except as provided by an agreement under section 233 of the Social Security Act) during any taxable year, .....”. Therefore, pursuant to the Code, it would appear that the above taxpayer was required to pay the TSI as he has asserted.

We also agree that the taxpayer would not be required to contribute to the Quebec Pension Plan as section 8 of the Quebec Pension Plan states that the provisions of that act with respect to the contributions of a self-employed worker for a year apply to persons who are resident in Quebec during the year for the purposes of the Taxation Act, unless they are resident therein only with respect to paragraph a of section 8 of the above-mentioned act. Paragraph a of section 8 is Quebec's equivalent of the 183 day sojourner rule found in paragraph 250(1)(a) of the Income Tax Act (the “Act”).

Having said this, we are of the view that the individual was required to contribute to the Canada Pension Plan with respect to his income from self employment as section 10 of that act states that every individual who is resident in Canada for the purposes of the Act during a year and who has contributory self-employment earnings for the year shall make a contribution for the year .... There is no exclusion for deemed residents as is found in the Quebec Pension Plan and the exemption for individuals required to contribute to a provincial plan (i.e.Quebec) is inapplicable for the reason outlined above.

Code section 1401(c) states that during any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, the self-employment income of an individual shall be exempt from taxes imposed by this section to the extent that such self-employment income is subject under such agreement to taxes or contributions for similar purposes under the social security system of such foreign country. Paragraph 6 of Article V of the Canada-U.S. Social Security Agreement (the “Agreement”) states that “where but for this Article, a person would be covered under the laws of both Contracting States in respect of earnings from self-employment, that person shall, in respect, thereof, be subject only to the laws of Canada if that person is considered to be resident in Canada for the purposes of the relevant provisions of those laws, and only to the United States laws in any other case”.

Consequently, based on the above, we believe that the taxpayer was required to make contributions to the Canada Pension Plan rather than pay the TSI for the years in question. As such, the taxpayer should be reassessed for the required Canada Pension Plan contributions and he should apply for a refund of the TSI from the U.S. authorities. There being no requirement to pay the TSI, any TSI contributions would not qualify as a “non-business-income tax”.

We trust that our comments will be of assistance.

For Director Reorganizations and International Division Income Tax Rulings and Interpretations Directorate

c.c. James Thompson Montreal Tax Services Office