Principal Issues: [TaxInterpretations translation] Are premiums paid for U.S. Medicare Part B by a recipient of U.S. pension income considered part of foreign non-business income tax or, alternatively, eligible for a medical expense credit?
Position: Premiums paid by a recipient of pension income for Part B of US Medicare do not form part of non-business-income tax for purposes of the foreign tax credit in subsection 126(1).
No definitive position on the eligibility of premiums as medical expenses. General comments on private health insurance plan premiums.
Reasons: U.S. social security tax includes the Medicare Tax, which is the payroll taxes paid by employees but not the premiums paid by social security recipients for Part B of Medicare.
The plan appears to contain the basic elements of an insurance plan, as described in paragraph 3 of Interpretation Bulletin IT-339R2. However, the details of Part B of Medicare would have to be examined to determine whether the covered expenses are limited to the medical expenses described in subsection 118.2(2) and to determine who is covered under Part B.
XXXXXXXXXX 2007-025466 Sylvie Labarre, CA May 6, 2008
Dear Sir,
Subject: Medicare Part B Premiums
This is in response to your letter of October 2, 2007 asking whether premiums paid to the U.S. Medicare plan (Part B of that plan) are eligible for a foreign tax credit in Canada or a medical expense credit under the Income Tax Act (the "Act").
A resident of Canada is entitled to a U.S. Social Security pension benefit, the gross amount of which is shown on an SSA-1099 slip. A portion of this amount is deducted to pay premiums to the U.S. Medicare (Part B) plan. The balance is paid to the Canadian resident.
You indicated that the gross amount will be converted to Canadian dollars and included in the pension income that will give rise to a pension credit under subsection 118(3). You indicated that this pension income will give rise to a deduction of 15% of the gross amount in Canadian currency in computing taxable income by virtue of the Canada-U.S. tax treaty.
You wish to know if the premiums paid to the U.S. Medicare (Part B) plan are considered as U.S. social security tax, which would permit them to be treated as part of the non-business-income tax paid for the year to the U.S. government for purposes of the foreign tax credit provided for in subsection 126(1).
If those premiums paid to Medicare are not considered U.S. social security tax, you wish to know if they qualify as medical expenses.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
As stated in the Medicare booklet produced by the U.S. government, Medicare is the national health insurance program for people who are at least 65 years old. Some people under 65 may also qualify for Medicare. Medicare is financed in part by payroll taxes paid by employees and their employers (Medicare tax). It is also financed by monthly premiums deducted from Social Security cheques.
Part B of Medicare is medical insurance that helps to pay for doctors' services and many other medical services, as well as medical products and appliances not covered by hospital insurance (Part A). More detailed information on Medicare coverage is available in Medicare & You at www.medicare.gov.
In our view, U.S. social security tax includes payroll taxes paid by employees (Medicare tax) but does not include premiums paid for Medicare Part B deducted from Social Security cheques. Thus, premiums paid for Medicare Part B will not form part of the non-business-income tax paid for the year to the U.S. government for the purposes of the foreign tax credit under subsection 126(1).
Whether premiums paid for Part B of Medicare qualify for a medical expense credit depends on whether they qualify as a premium for a private health services plan under paragraph 118.2(2)(q). Interpretation Bulletin IT-339R2 explains our interpretation of "private health services plan".
The term "private health services plan" is defined in subsection 248(1). According to paragraph 3 of Interpretation Bulletin IT-339R2, a private health services plan qualifying under paragraphs (a) or (b) of the definition in subsection 248(1) is a plan in the nature of insurance. In this respect the plan must contain the following basic elements:
(a) an undertaking by one person,
(b) to indemnify another person,
(c) for an agreed consideration,
(d) from a loss or liability in respect of an event,
(e) the happening of which is uncertain.
According to paragraph 4 of Interpretation Bulletin IT-339R2, coverage under a plan must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit.
Subject to further review by the Tax Centre or the Tax Services Office serving the taxpayer, Medicare appears to encompass the basic elements of being an insurance plan according to paragraph 3 of Interpretation Bulletin IT-339R2. However, in order to qualify for the medical expense tax credit, it would be necessary to determine whether the only expenses covered by the plan are eligible medical expenses pursuant to subsection 118.2(2) and who is covered by the plan, which is a question of fact.
You had a final question about the obligation to contribute to Medicare and the possible right to Medicare reimbursement. As this question relates to the rules of the U.S. Medicare system, we cannot answer this question as we are not mandated to provide answers with respect to such rules. You should contact the U.S. authorities.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.