28 April 1999 Internal T.I. 9820787 - FRENCH SOCIAL SECURITY CONTRIBUTIONS

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: Whether social security contribution paid to the French government is treated as income or profits tax creditable in Canada?

Position: Yes if it is mandatory.

Reasons: Is is similar to FICA or German social security contribution and we stated previously that social security contribution which is mandatory and is similar to those noted above is creditable.

		April 28, 1999

M. Quebec, Director[X1] International Section
International Tax Services Office S. Leung
957-2115
Attention: Gail Gosselin
982078

XXXXXXXXXX
French Social Security Contributions

We are writing in reply to a memorandum of August 12, 1998 from France Marengere (the “Memo”) in which she requested our opinion as to whether the social security contributions made to the French government by XXXXXXXXXX (the taxpayer) are income or profits taxes creditable under section 126 of the Income Tax Act (the “Act”).

Based on the information from the Memo and our telephone conversation of March 31, 1999 (Gosellin/Leung), the taxpayer is a factual resident of Canada who earns employment income in France by working for a private company there and who is required to make French social security contributions. It was stated in the Memo that the social security levy (contribution sociale généralisée) is payable by all French resident individuals. It is not clear whether the taxpayer is a resident of France and if he is whether the residency tie-breaker rule under the Canada-France Income Tax Convention (the “Convention”) goes in favour of Canada. It is also not clear whether the taxpayer had been a resident of France before he became a resident of Canada. Your records only show that he has been a resident of Canada for many years. In addition to earning employment income from France, the taxpayer also earned employment income in Canada from a separate employment in 1997.

In respect of the taxpayer’s employment in France, it appears that the Agreement on Social Security Between Canada and France does not apply to the taxpayer because the taxpayer’s remuneration is not paid by a Canadian employer nor is the taxpayer working for the Government of Canada. It appears that the salaries or wages earned by the taxpayer in performing services in France for a French employer is subject to French social security contributions.

From the information we have at our disposal, it is our understanding that French social security contributions are levied on the employees in respect of health insurance, retirement pension, death benefit, old age benefit, and unemployment insurance benefit. In addition, the employees are required to make a non-deductible general social contribution (CSG) and a non-deductible social security deficit funding contribution (CRDS). These latter contributions are independent of and in addition to the basic social security contributions. The 2.4% levy mentioned in the memorandum from your office is likely a CSG contribution because to the best of our knowledge the basic social security contributions are more than 15% of gross salaries or wages.

We have stated previously that, subject to the social security agreements between Canada and the foreign countries, U.S. social security contributions (FICA and Medicare) and contributions to the German social security system which are mandatory, are income or profits taxes creditable for Canadian tax purposes. We have also stated that social security contributions made to other countries are creditable taxes provided they are mandatory and are similar to FICA or the German contributions. Therefore, to determine whether all or a portion of the French social security contributions are creditable taxes for Canadian tax purposes, we need to know whether the two criteria set out above are met.

It is our understanding that not all of the French social security contributions are mandatory in that in certain cases an employee can choose to make certain voluntary contributions. For example, the contributions in respect of complementary retirement pension appear to be voluntary. As only mandatory contributions are creditable for Canadian tax purposes, you may need to have the taxpayer obtain confirmation from the French authorities as to what portion of the contributions that he made is mandatory.

It would appear that the French social security contributions are based on gross salaries or wages. In that sense, they are similar to FICA or the German social security system and can be considered to be income or profits taxes. As a result, the portion of the French social security contributions that is mandatory is creditable for Canadian tax purposes.

It is our view that the provisions of paragraph 5 of Article 29 of the Convention would likely not be applicable to XXXXXXXXXX situation. That paragraph states:

“Contributions in a year in respect of services rendered in that year paid by, or on behalf of, an individual who is a resident of one of the Contracting States (Canada) or who is temporarily present in that State (Canada), to a pension plan that is recognized for tax purposes in the other Contracting State (France) shall, during a period not exceeding in the aggregate sixty months, be treated in the same way for tax purposes in the first-mentioned State (Canada) as a contribution paid to a pension plan that is recognized for tax purposes in the first-mentioned State (Canada), provided that:

(a) such individual was regularly contributing to the (French) pension plan (or to another pension plan for which that plan has been substituted) over a period ending immediately before he became a resident of or temporarily present in the first-mentioned State (Canada); and

(b) the competent authority of the first-mentioned State (Canada) agrees that the pension plan corresponds generally to a pension plan recognized for tax purposes by that State (Canada).

For the purposes of this paragraph, the term “pension plan” includes especially a pension plan created under a public social security system.”

The purpose of the above treaty provision as we understand it is for the foreign country to give relief for the first five years to a taxpayer who has been contributing to a pension plan in his home country and who goes to work in the foreign country but continues to make contributions to the pension plan in his home country. That provision does not apply to a resident of Canada who goes to work in France and makes contribution to the French pension plan to which he has never made any contribution before. Furthermore, in the case of XXXXXXXXXX, the provision would not apply to him even if immediately before he became a resident of or temporarily present in Canada he had been a resident of France and had been regularly contributing to a French pension plan because the sixty-month period specified in the provision seems to have expired.

In summary, it is our opinion that the portion of the French social security contributions which is mandatory paid by a resident of Canada is creditable for Canadian tax purposes as it is considered to be an income or profit tax.

Other Comments

For your information, if a taxpayer is eligible for a relief under paragraph 5 of Article 29 of the Convention with regard to the French social security contributions and at the same time all or a portion of the French social security contributions which is mandatory is creditable for Canadian tax purposes, nothing in the Act or the Convention would preclude the taxpayer from claiming a foreign tax credit for such mandatory contributions made to the French government under their social security system. In this regard, it should be noted that the provisions of the Convention are in general relieving in nature. If a more favourable tax treatment is afforded under the Act, the provisions of the Convention do not act to prevent the taxpayer from being entitled to such a favourable tax treatment. Therefore, it is our opinion that notwithstanding paragraph 5 of Article 29 of the Convention (and although there is no provision in the Convention similar to paragraph 1 of Article XXIX of the Canada-United States Income Tax Convention or paragraph 1 of Article 29 of the Canada-Germany Income Tax Convention), if the taxpayer chooses to claim a foreign tax credit under the Act instead of a deduction under paragraph 5 of Article 29 of the Convention in respect of the French social security contributions that he made which are mandatory, he should be provided with such a credit.

If you have any questions regarding the above, please do not hesitate to contact Simon Leung of our office at telephone number 957-2115.

for Director
Reorganization and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch

P.S.: For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (613)957-0682. The severed copy will be sent to you for delivery to the client.

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