29 April 1988 Income Tax Severed Letter 7-2623 - [Section 217 Election]

REVENUE CANADA TAXATION MEMORANDUM

DATE Apr. 29, 1988

TO Source Deductions Division

G.W. Richardson Non-Resident Section

FROM Specialty Rulings Directorate
        K.B. Harding
        (613) 957-2129

SUBJECT Section 217 Election

This is in reply to your memorandum of March 4, 1988 wherein you requested our comments on the election made under section 217 of the Income Tax Act in the following situation.

A resident of the United States is in receipt of income of a type on which he can make a section 217 election. He is also in receipt of Old Age Security benefits and payments from the Canada Pension Plan.

You are concerned whether any of the provisions of the Canada-U.S. Income Tax Convention (Convention) would require Canada to reduce the amount of OAS or CPP benefits for the purpose of the calculation of the election under section 217 of the Act.

Paragraph 51 of interpretation Bulletin IT-193 provides for a deduction in computing the income of a taxpayer who has made an election under section 217 of the Act for amounts exempted under paragraph 110(1)(f) of the Act with respect to amounts included in income by virtue of paragraph 114(b) of the Act. Paragraph 13 of Interpretation Bulletin IT-163R2

states that Division C deductions applicable to individuals electing under section 217 of the Act are computed in the manner described in IT-193 . Accordingly, the department has taken the position that in the calculation of taxable income under section 217 of the Act, it is necessary to provide a paragraph 110(1)(f) deduction with respect to income which is exempt under tax treaties negotiated with foreign governments.

In your particular situation, paragraph 5 of Article XVIII of the Convention provides that social security benefits paid from Canada to a resident of the United States shall be taxable only in the United States. Since OAS and CPP are considered as benefits paid under the social security legislation of Canada, such amounts are exempt from tax in Canada by virtue of the Convention. Therefore, in the calculation of taxable income under section 217 of the Act Canada will be required to provide a paragraph 110(1)(f) deduction with respect to OAS, CPP and any other types of income which are exempt under the Convention.

We trust these comments are suitable for your purposes.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch c.c.: Hans Braeuel