Principal Issues: Whether premiums paid by a Canadian resident under the United States Federal Insurance Contributions Act (FICA) are creditable under the foreign tax credit allowed under subsection 126(1) of the Income tax act?
Position: Yes.
Reasons: Wording of the ITA and the Canada - US Tax Convention, previous position.
XXXXXXXXXX 2008-030408 Yannick Roulier Attention: XXXXXXXXXX
April 21, 2009
Dear Sir:
Re: US social security taxes and foreign tax credit
This is in reply to a letter of December 8, 2008, in which we are asked whether premiums paid by a Canadian resident under the United States Federal Insurance Contributions Act 1 ("FICA") are creditable under the foreign tax credit allowed under subsection 126(1) of the Income tax act. All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("ITA").
Position and comments
As a general rule, social security taxes paid by a person resident in Canada to the government of a country other than Canada do not qualify as non-business income taxes under paragraph 126(7) for the purpose of the foreign tax credit allowed under paragraph 126(1). This is because social security taxes are not income or profits taxes, as mentioned in the Income Tax Technical News ("ITTN") no. 30, dated May 21, 2004. This position was effective for the 2004 and subsequent taxation years.
By exception to the general rule, the Canada Revenue Agency ("CRA") will generally accept that a contribution paid by a Canadian resident to a foreign public pension plan be considered as a non-business income tax for the purpose of the foreign tax credit allowed under paragraph 126(1) where the following two conditions apply :
- the employee is compelled to make the contribution pursuant to the legislation of the foreign country; and
- it is reasonable to conclude that the employee will not be eligible for any financial benefit from his/her contribution considering that the employment in the foreign country was temporary and for a short period of time.
This administrative relief was effective for the 2004 and subsequent taxation years, as stated in ITTN no. 31R2, dated May 16, 2006.
Another exception to the general rule exists in respect of social security premiums paid under the FICA by an individual who is a Canadian resident pursuant to the ITA and the Canada - United States Tax Convention ("Convention"). Subchapter A social security taxes paid by an employee for old-age, survivors, and disability insurance benefits, in the first place, and for hospital insurance benefits, in the second place, constitute United States social security taxes under paragraph 2(b)(iii) of Article II of the Convention. They are therefore specifically covered by paragraph 2 of Article XXIV of the Convention. Consequently, such premiums qualify as a non-business income tax, as this expression is defined in subsection 126(7), for the purpose of the foreign tax credit allowed under paragraph 126(1).
Finally, we note that the 5th Protocol concluded on September 21, 2007 between Canada and the United States does not implement any fundamental change to paragraph 2(b)(iii) of Article II and paragraph 2(a) of Article XXIV of the Convention.
The above comments constitute technical interpretations. They are not income tax rulings and are not binding on the CRA.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 26 U.S.C. ch. 21.