Principal Issues: Is an amount received from US Social Security by the child (Canadian resident) of a deceased taxpayer as survivor benefit under the US Social Security Act taxable in Canada?
Position: Taxable pursuant to paragraph 56(1)(a) of the Act and deduction of 15% of the gross benefit pursuant to Canada-United States Tax Convention and paragraph 110(1)(f) of the Act.
Reasons: subject to any overriding provisions of a tax treaty, residents of Canada are taxable on their world income pursuant to subsection 2(1) of the Act. This includes social security income received from a foreign country. Pursuant to paragraph XVIII(5) of the Canada-United States Tax Convention, only 85% of the payments received under United States social security legislation by a Canadian resident is taxable in Canada and the said payments are tax exempt in the United States. Among the benefits provided under the United States social security system federal old-age, survivor and disability insurance benefits under the United States Social Security Act are commonly referred to as the "social security benefits", covered by the Tax Convention.
XXXXXXXXXX 2007-022848 Sylvie Labarre, CA November 8, 2007
Dear Sir:
Re: US Social Security Benefits
This is in reply to your letter of March 27, 2007 in which you requested our views on whether US social security benefits received by the children of a deceased taxpayer (his survivors) are taxable in Canada.
A taxpayer, who had been employed in the US and had been a US citizen, passed away in 2006. His two surviving children, residents of Canada, receive US social security benefits as survivor of the deceased.
Our comments
Although you have asked for a technical interpretation, the situation presented is a factual one involving specific taxpayers. Requests for confirmation of the tax consequences of this type of situation are handled by the local tax services office. We are, however, prepared to provide some general comments.
If the receipt is a survivor benefit under the US Social Security Act, the amount is taxable under paragraph 56(1)(a) of the Act and the children have to include the amount (converted to Canadian dollars) in their income. In addition, the children are not taxable on 15% of the gross benefit by virtue of paragraph 5 of Article XVIII of the Canada-United States Income Tax Convention (the Treaty) and paragraph 110(1)(f) of the Act. In order to qualify for that exemption in the Treaty, (which is reflected through a deduction in computing income pursuant to paragraph 110(1)(f) of the Act), the benefits must be payable by the United States by virtue of their Social Security Act. Among the benefits provided under the United States social security system, federal old-age, survivor and disability insurance benefits under the United States Social Security Act are commonly referred to as the "social security benefits" covered by the Treaty.
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