9 February 1987 Income Tax Severed Letter 5-2711 - [870209]

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.

M.D. Praulins Tel: (613) 957-2123

February 9, 1987

This is in reply to your letter of January 4, 1967 which you had directed to the attention of Mr. R.G. D'Aurelio, Director of the Provincial and International Relations Division. You requested clarification of the terms of the 1980 Canada - U.S. Income Tax Convention (the 'Convention') with respect to taxes to be withheld in 1987 from XXXX tier I and tier 2 benefit payments for you and your spouse. It is assumed that you are both Canadian residents for purposes of the Convention.

In your letter you did not indicate whetber you and your spouse are U.S. or Canadian citizens, and the comments below reflect the tax implications under both situations.

In preparing our response, it was assumed that you have already fully recovered your tier 2 contributions in earlier years and thus all tier 2 benefits currently received are fully taxable.

1. U.S. Citizens

As indicated on Form RL-120(1-85) entitled 'Tax Withholding Notice', a recent change to U.S. Federal income tax law resulted in part of your tier 1 payment being taxed in a manner similar to the taxation of a tier 2 payment.

If our understanding of the nature of tier 1 payments under the XXXX is correct, then part of the tier 1 payment represents social security benefits, while the excess is "equivalent to tier 2 benefits". This change was effective January 1, 1987.

All tier 1 benefits are required to be included in income for tax purposes in Canada by virtue of subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"). However, as part of this receipt represents social security benefits to which the provisions of part 5 of Article XVIII of the Convention apply, the recipient may look to subparagraph 110(1)(f)(i) of the Act for a deduction of one-half of the portion representing social security benefits included in income. Thus fifty (50) percent of the social security portion of tier 1 benefits are excluded from taxable income as a result of the Convention and the Act.

It is our understanding that the U.S. is not required to exempt U.S. social security benefits from tax if the Canadian resident receiving such benefits is a U.S. citizen. However, because a U.S. citizen will be filing a Form 1040 - U.S. Individual Income Tax Return, the recipient may elect to reduce withholding taxes to a level which will approximate taxes otherwise payable to the U.S. Government. May we respectfully suggest that you write to the XXXX for information on the provisions available to you.

The portion of tier 1 payments which are the "equivalent to tier 2 benefits" and tier 2 benefits are considered to be ordinary pension payments and applicable provisions are found in parts 2 and 3 of Article XVIII of the Convention. Such payments are fully taxable in Canada and according to the convention withholding tax in the U.S. on such payments to a resident of Canada cannot exceed 15%.

You will probably be receiving an information slip from the XXXX indicating the proportion of each type of benefit received during 1987.

2. Canadian Citizens

Fifty (50) percent of the social security portion of tier 1 benefits are deductible in arriving at taxable income for Canadian income tax purposes, which is similar to the applicable provisions outlined in 1 above. However, if we understand correctly the information available to us, the U.S. Government will not withhold any taxes on the tier 1 social security benefit portion for Canadian citizens.

As outlined in 1 above, both the "equivalent to tier 2 benefits" portion of the tier 1 payment and tier 2 benefits, are included in income for Canadian income taxes pursuant to subparagraph 56(1)(a) of the Act and as a result, are fully taxable in Canada. According to the convention, the maximum withholding tax that may be imposed by the U.S. on such payments is limited to 15%.

To ensure that your XXXX are not double-taxed, your Canadian income tax returns should show all withholding taxes paid to the U.S. Government. You may be eligible for a foreign tax credit equal to the lesser of:

(a) the amount withheld by the U.S. Government and as permitted by the Convention; and

(b) the Canadian taxes payable in respect of your pension benefit.

Your foreign tax credit is limited to the amount allowable by the Convention.

We trust this is adequate for your purposes and will provide you with sufficient information with which to pursue your concerns with the IRS and the XXXX

Yours truly ORIGINAL SIGNED BY

for Director Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch MY/md