Taxation of Social Security Benefits:
Protocol to the Canada-U.S. Income Tax Convention - Frequently-Asked Questions
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1. Is this agreement different from what was announced in April?
No, it is the same agreement. In April, Canadian and United States officials agreed to recommend that their governments sign a Protocol on these matters. A few administrative details had to be finalized before signing could take place. Now the Protocol has been finalized and signed.
2. Is the text of the Protocol available?
Yes, the text of the Protocol has been made public. It is attached to the Department of Finance release announcing the signing of the Protocol. It is also available on the Internet, at http://www.fin.gc.ca/.
3. When will the changes take effect?
The Protocol will become law only when it has been ratified in both countries. It will then apply to all social security benefits paid after 1995.
4. What has to happen for the Protocol to be ratified?
In Canada, Parliament must make the Protocol part of the law of Canada. This requires a Bill to be passed by both the House of Commons and the Senate. In the United States, the Protocol must be approved by the U.S. Senate.
5. Where can I get more information?
The following notes answer the most common questions about these changes. These answers assume that the Protocol will be ratified between September 1, 1997 and December 31, 1997. If it is ratified after December 31, 1997, some of the details will change, and these questions and answers will be updated.
1. What U.S. social security benefits are affected by the proposed changes to the tax treaty?
The benefits that are affected are those provided under Title II of the U.S. Social Security Act. These include retirement, survivor, and disability benefits. Railroad retirement benefits provided under Tier 1 of the Railroad Retirement Act are also affected. In these questions and answers we use the term "U.S. social security benefits" to refer to all of these benefits.
2. How do the proposed changes affect the taxation of these benefits?
The U.S. currently withholds a non-refundable tax equal to 25.5% of the U.S. social security benefits that it pays to a Canadian resident who is not a U.S. citizen or resident alien. Canada does not tax these benefits and therefore does not allow the recipient to use the tax that was withheld as a credit on the recipient's Canadian tax return. Canada does require the recipient to include U.S. social security benefits in net income, but allows the recipient to deduct an equal amount in calculating taxable income.
Under the proposed changes, the U.S. will stop withholding tax. U.S. social security benefits received by a resident of Canada will be taxable in Canada. However, Canada will include in taxable income only 85% of the benefits you receive. The other 15% will be exempt from tax.
3. I live in Canada and in 1996 and 1997 I paid United States tax on my U.S. social security benefits. When will I get a refund?
The Protocol will become law only when both countries have signed and ratified it. You should be able to get your 1996 refund shortly after the Protocol has been ratified.
4. Will the Government of Canada refund my 1996 and 1997 U.S. tax?
Your 1996 and 1997 U.S. tax will come to you through the Government of Canada. It will be based on tax information provided by the United States Government.
Most Canadians who have paid U.S. tax on U.S. social security benefits will not have to fill out any forms or take any special steps. Revenue Canada will set up a simple and fast refund system that will handle their refunds automatically. However, if you have recently moved to Canada or you did not file a 1996 or 1997 Canadian income tax return, this automatic system may not apply to you. You should contact Revenue Canada for more information.
5. How much tax will I get back?
You will not have to pay any U.S. tax on U.S. social security benefits you have received since the beginning of 1996. Because your U.S. social security benefits will be taxable in Canada instead, you may have to pay some additional Canadian tax. How much, if any, Canadian tax you pay will depend on your own circumstances. But the Canadian tax for 1996 and 1997 on your U.S. social security benefits will be no greater than the U.S. tax rate.
In most cases, Revenue Canada will be able to compute your Canadian tax based on your Canadian income tax return and the information provided by the United States Government. Revenue Canada will then refund you the difference between the U.S. tax you have paid and any Canadian tax on your U.S. social security benefits.
6. Will the Canadian tax on my benefits be higher than the U.S. tax?
For 1996 and 1997, when the U.S. withheld tax from your U.S. social security benefits, your Canadian tax on those benefits will not be any more than the U.S. tax you have already paid.
For the future, the Canadian tax you pay will reflect your total income. This means that the Canadian tax on your benefits may be higher than the U.S. tax now is. This is because total Canadian tax rates (including provincial tax) are usually higher than the U.S. withholding rate. However, if your income is very low you will pay little or no tax on your U.S. social security benefits.
7. Will this change affect my 1996 Canadian income tax return?
It will not affect how you complete your 1996 income tax return. If you have not already filed your 1996 return, you should do so according to the present law. That is, you should include all your U.S. social security benefits in your income, then deduct them in computing your taxable income.
Once the Protocol has been ratified, your 1996 Canadian tax may change. You may have to pay Canadian tax on your U.S. social security benefits. But the Canadian tax on your 1996 U.S. social security benefits will not exceed the U.S. tax rate on those benefits.
We will put in place a system to make the adjustment of your 1996 taxable income as simple as possible for you. In most cases, Revenue Canada will make all the necessary calculations.
8. When will the U.S. stop taking tax off my benefits?
Neither Canada nor the U.S. can stop taking tax off the benefits it pays until the Protocol has been ratified by both countries.
Once the Protocol has been ratified, it may take some time for the tax systems to change over. But any excess tax the U.S. continues to collect on your U.S. social security benefits will be refunded.
9. I am a U.S. citizen. What does this change mean for me?
You will be treated the same as other residents of Canada. Your U.S. social security benefits will be subject to tax only in Canada. For the retroactive period since the beginning of 1996, the Canadian tax on those benefits will not exceed your U.S. tax.
1. What Canadian payments are affected by the proposed changes to the convention?
The proposed changes affect social security benefits paid by one country to a resident of the other country. In the case of Canada, this means any benefit or supplement paid under the Old Age Security Act (OAS), and any payment under the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). In these questions and answers we use the term "Canadian benefits" to refer to all of these benefits.
2. How do the proposed changes affect the taxation of these benefits?
Since January 1, 1996, non-resident recipients of OAS, CPP and QPP have been subject to non-resident withholding tax of 25%. This rate of withholding may be reduced or eliminated under the terms of an income tax convention, but under the Canada-U.S. treaty, Canada currently has the right to tax social security benefits without restriction. U.S. residents can, however, choose to file a Canadian income tax return, and pay tax on their Canadian benefits (and some other kinds of income) at the same rate as a resident of Canada. For low-income individuals this generally results in a tax rate lower than 25%. In addition, higher income U.S. residents are currently subject to recovery tax on OAS benefits.
Under the proposed changes, OAS, CPP and QPP paid to a resident of the U.S. will be taxable only in the U.S. There will be no withholding or filing requirement in Canada with respect to OAS, CPP and QPP. U.S. residents should contact the Internal Revenue Service (IRS) with questions about the tax treatment of OAS, CPP and QPP in the U.S.
3. I live in the U.S. and I have paid Canadian tax on my Canadian benefits. When will I get a refund?
The proposed agreement (known as a Protocol) will become law only when it has been signed and ratified in both countries. You should be able to get your 1996 refund shortly after the Protocol has been ratified.
4. Which Government will refund my Canadian tax?
Canada will refund the Canadian tax on your Canadian benefits. To apply for a refund, you will use a special Revenue Canada form. You should receive the form in the mail shortly after the Protocol is ratified. If you do not, you can get a copy from Revenue Canada.
5. How much tax will I get back?
Canada will refund all of the tax Canada has collected on Canadian benefits paid to all U.S. residents who apply. However, those who apply will be subject to U.S. tax on their Canadian benefits, instead of Canadian tax. For more information about United States tax rules and how the refund will work in your particular case, you should contact the United States Internal Revenue Service (IRS).
6. Will this change affect my 1996 Canadian tax return?
It will not affect how you complete any income tax return you file in Canada for 1996. If you have not already filed a 1996 return, you should do so according to the present law. Any Canadian tax you pay on your 1996 Canadian benefits will be refunded to you once the Protocol has been signed and ratified.
7. What do I have to do differently now that this change has been announced?
Until the Protocol is ratified, neither the way your benefits are treated nor the forms you must file will change. Human Resources Development Canada will continue to withhold non-resident tax from OAS, CPP and QPP benefits.
- To continue receiving OAS benefits after June 1997, U.S. residents should still file the 1996 Old Age Security Return of Income (OASRI).
- If you obtained a reduced withholding rate for 1996 by filing form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld, you should have filed the required Canadian income tax return by June 30, 1997.
- While we expect the Protocol to be ratified before 1998, it may be delayed. In order to qualify for a reduced rate of withholding in 1998, you should file form NR5 in the fall of 1997.
8. My OAS benefit was suspended because my income was high (or because I did not file the OASRI). Will it be reinstated automatically?
If you filed the 1995 OASRI, and your benefits stopped due to high income, your OAS benefit will automatically restart after the Protocol is ratified. If your OAS benefits stopped because you did not file the 1995 OASRI, you should contact Human Resources Development Canada to have your benefits resumed.