CVITP Assist: US Social Security Income

U.S. SOCIAL SECURITY INCOME

What is Social Security?

U.S. Social Security is similar to the Canada Pension Plan. As with CPP, people pay into the Social Security program through payroll taxes, or if self-employed through their federal tax returns. Americans have to pay into the system for at least 10 years to qualify. The program pays retirement benefits, but, as with CPP, there are also disability and survivor benefits. The benefit amount is calculated based on average indexed monthly earnings during the contributor’s 35 highest-earning years.

Recipients of social security will receive a Form SSA-1042S:

How is social security income entered into UFile?

For residents of Canada, U.S. Social Security is reportable income, but 15% will be deducted on the Canadian return and therefore only 85% is taxable.^[1]

In Interview setup, click the box next to Foreign income or foreign property. Under Foreign income and property, click the plus sign next to Foreign pension income (includes U.S. social security benefits).
For the country option, choose United States (tax treaty with Canada). For description, enter social security. Enter the average Can-US exchange rate for the tax year.
For Type of foreign income received, select United States social security benefits (15%), assuming the benefits started after January 1, 1996.^[2]
Enter the gross amount of the social security benefit, inclusive of tax withheld (if any) and Medicare premiums.

The income will be reported on Line 11500 – Other Pensions and superannuation.

If the 15% option applies the person will be entitled to a 15% deduction in the calculation of taxable income. For example if the benefit was $10,000 the person will be entitled to a $1,500 deduction in taxable income. If the 50% applies the person will be entitled to a 50% deduction. UFile will report the deduction on Line 25600.

Can Medicare premiums be claimed as a medical expense?

The answer is unclear. The Income Tax Act provides that premiums paid to a private health services plan can be claimed.^[3] As the premiums are paid by a public body, i.e. the U.S. government, it would be reasonable to believe that the premiums are not claimable. However, the Act contains a definition of ‘private health services plan’ which doesn’t obviously exclude medicare premiums.^[4] The CRA has considered the issue in a tax ruling and gave an equivocal answer.^[5] The conservative course of action is to not claim the premiums.

Can a foreign tax credit be claimed for U.S. withholding tax paid?

There should not be a withholding tax in the first place, and therefore there should be no requirement to claim a foreign tax credit.

Article XVIII of the U.S - Canada tax treaty provides that “Benefits under the social security legislation in a Contracting State paid to a resident of the other Contracting State shall be taxable only in that other State.”^[6] Therefore, for a U.S. citizen who has become a resident of Canada for tax purposes, U.S. Social Security is taxable only in Canada. If a tax is being deducted, the person should make a request to the U.S. Social Security Department to stop withholding tax.

In the UFile section where social security is added, the line for adding foreign tax paid says, “leave blank for US social security benefits”. UFile will not calculate a foreign tax credit even if an amount is entered.

References:

[1] U.S.-Canada Tax Treaty, Article XVIII, paragraph 5.

[2] In the unlikely event that the social security benefits started before January 1, 1996, the deduction is 50% and therefore only 50% of the social security is taxable.

[3] Section 118(2)(q)

[4] Section 248(1)

[5] Severed Tax Letter 2001-0109875

[6] The U.S.-Canada Tax Treaty has a heavy-handed ‘saving provision’ (Article XXIX) which permits the U.S. to tax its citizens as it wishes despite the provisions of the tax treaty. However, Article XVIII is exempt from the saving provision.