ALERT: US workers living in Canada: SS not a tax

nelsona · Post by **nelsona** » Fri Nov 25, 2005 8:21 am

Note: as those who read the entire thread will see, this was an erroneos conclusion on my part: SS tax (all of them) continue to be foreign taxes, its just the mechanics o claiming them have been changed.

In reviewing the more recent Cdn tax changes, I came a cross a startling change that would drastically affect those who live in Canada and work in US.

CRA has now taken the position that out of SS, Medicare and Fica payments that these employeees make, only FICA is will be eligible for foreign tax credit.

It appears that Social security itself will continue to be allowed to be excluded from your income (as it is on your W-2) as indicated in the 2004 tax guide, but the announcement below would seem to indicate that for 2005, one wil have to bump up their W-2 income by the SS and FICA they paid, and only be allowed to deduct FICA.

http://www.cra-arc.gc.ca/E/pub/tp/itnew ... 31r-e.html

nelsona non grata... and non pro

Greg · Post by **Greg** » Fri Nov 25, 2005 12:07 pm

Nelson sorry if I'm reading this wrong, but I'm confused please correct me if I’m wrong on this. FICA payments include 12.4 percent of your earned income up to an annual limit must be paid into Social Security, and an additional 2.9 percent must be paid into Medicare. If you're a wage or salaried employee, you pay only half the FICA bill (6.2 percent for Social Security + 1.45 percent for Medicare), and the tax is automatically withheld.

The technical document states that under the Canada-U.S tax convention payments under the (FICA) Federal Insurance Contributions Act (Social Security & Medicare) will continue to allow a foreign tax credit.

So who will this effect if it is still protected under the Canada-U.S convention?.
Thanks

Norbert Schlenker · Post by **Norbert Schlenker** » Fri Nov 25, 2005 3:05 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by nelsona

CRA has now taken the position that out of SS, Medicare and Fica payments that these employeees make, only FICA is will be eligible for foreign tax credit.

It appears that Social security itself will continue to be allowed to be excluded from your income (as it is on your W-2) as indicated in the 2004 tax guide, but the announcement below would seem to indicate that for 2005, one wil have to bump up their W-2 income by the SS and FICA they paid, and only be allowed to deduct FICA.
<hr height="1" noshade id="quote"></blockquote id="quote">
I respectfully disagree, Nelson. I quote from the release

<blockquote id="quote">quote:<hr height="1" noshade id="quote">As provided in the Canada-U.S tax convention however, Canada has specifically agreed to give a foreign tax credit for payments under the Federal Insurance Contributions Act, more commonly known as FICA taxes. In accordance with our tax treaty with the U.S., the CRA will continue to allow a foreign tax credit for FICA taxes.<hr height="1" noshade id="quote"></blockquote id="quote">
FICA (http://frwebgate.access.gpo.gov/cgi-bin ... +26USC3101) levies both OASDI and Hospital premiums, i.e. both the 6.2% SS deduction and 1.45% deduction. Consequently all US social security taxes paid are creditable against Canadian income tax liabilities.

nelsona · Post by **nelsona** » Sat Nov 26, 2005 7:35 am

Your disagreement is not with me:

From the Bulletin:

<blockquote id="quote">quote:<hr height="1" noshade id="quote">As a rule, social security taxes will no longer be accepted as non-business income taxes for the purposes of the foreign tax credit. (...)

As provided in the Canada-U.S tax convention however, Canada has specifically agreed to give a foreign tax credit for payments under the Federal Insurance Contributions Act, more commonly known as FICA taxes. In accordance with our tax treaty with the U.S., the CRA will continue to allow a foreign tax credit for FICA taxes. (...)

The change is effective for the 2004 and subsequent taxation years
<hr height="1" noshade id="quote"></blockquote id="quote"> Bold mine

So it does appear that CRA differentiates between Social Security and FICA. From your FICA link, I don't see a difference. CRA does, and calls it a change

Moreover, from the 2004 General tax guide (for line 104):

<blockquote id="quote">quote:<hr height="1" noshade id="quote">The amount on your United States W-2 slip may have been reduced by such contributions to a "401(k), 457 or 403(b) plan, US Medicare and Federal Insurance Contributions Act (FICA)." These contributions are not deductible on your Canadian return. Therefore, you have to add these amounts into your income as well. <hr height="1" noshade id="quote"></blockquote id="quote">

So, here, for the first time at line 104, we have their interpretion of the CHANGE. Note that it also here diferentiates between Medicare and FICA, making no mention of Social Security.

Later at Line 431:

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Beginning in 2004, mandatory foreign social security contributions, other than U.S. FICA payments, will no longer be accepted as non-business income taxes for foreign tax credit purposes.<hr height="1" noshade id="quote"></blockquote id="quote">

No mention of medicare on this line.

So, CRA has indeed changed its treatment of US Social Security tax. Otherwise it would not have had to change IT-270, and it would not have had to change the guide for these lines.

It also appears, as I said in my original post, that it treats Social Security tax differently that FICA, and that there is a difference between FICA and Medicare(?).

Perhaps the confusion is mine, however I don't understand why they would announce a change which is not a change at all[?]

If you are correct Norbert, that ALL facets of SS tax contiunes to be tax deductible/creditable then what are the possible reasons for this announcement/change? Here's my offerings:

(a) CRA wanted to be sure that taxpayers from countries other than US, who pay SS tax (like Germany and France), that their SS is no longer deductible/creditable. Period.

This may be borne out by the more detailed discussion in the bulletin preceding ITNEWS 31:

http://www.cra-arc.gc.ca/E/pub/tp/itnew ... -30-e.html

If that was the case, hoever, wouldn't simply have been clearer to say: "We no longer give credit for SS taxes from Germany and France, but still do for US by treaty."

(b) CRA/IRS are about to release a protocol to ammend the Tax treaty, and will remove the FICA clause, and thus CRA is preparing language in their regulations which would exclude it at that moment?

(c) CRA realy is confused about what SS/FICA/OASDI/Medicare really are., and have merely passed this confusion on to the customer.

nelsona non grata... and non pro

Norbert Schlenker · Post by **Norbert Schlenker** » Sat Nov 26, 2005 1:53 pm

Nelson, the text of the CRA bulletin always uses the term "social security" in lower case, i.e. it's a general term, not a legal definition. What Americans refer to as "Social Security" can mean the retirement plan for seniors, the medical plan for seniors, or indeed both. The terms are used very loosely in regular conversation. The CRA bulletin is much more precise.

In particular, the bulletin says, "As provided in the Canada-U.S tax convention however, Canada has specifically agreed to give a foreign tax credit for payments under the Federal Insurance Contributions Act, more commonly known as FICA taxes." The language is perfectly clear: All payments levied under that Act are eligible for FTC treatment in Canada.

I linked the text of FICA itself. The language in there is perfectly clear: It requires payments of 6.2% for OASDI (colloquially retirement and disability) and 1.45% for Hospital (colloquially Medicare).

"The change is effective for the 2004 and subsequent taxation years" doesn't concern me at all. The bulletin lays out what has changed - CRA's understanding of what the law means when it refers to foreign income taxes, an Income Tax Act (Canada) provision under which FICA is no longer seen to qualify - but that does not matter in the case of the US because the treaty specifically includes FICA as a creditable tax. (Meanwhile, French and Germans can get stuffed. [}:)])

<blockquote id="quote">quote:<hr height="1" noshade id="quote">If that was the case, hoever, wouldn't simply have been clearer to say: "We no longer give credit for SS taxes from Germany and France, but still do for US by treaty."<hr height="1" noshade id="quote"></blockquote id="quote">
Yes, but that would have taken a few days' careful drafting and a few committee meetings' careful editing out of some bureaucrat's workload. We can't have that sort of thing happening.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">(b) CRA/IRS are about to release a protocol to ammend the Tax treaty, and will remove the FICA clause, and thus CRA is preparing language in their regulations which would exclude it at that moment?<hr height="1" noshade id="quote"></blockquote id="quote">
Anything is possible. I no longer lose sleep over what governments will do in future. You can go through life as a pessimist - always a good bet when it comes to a government - but there's no point in fretting about how to avoid a future dunking because chances are they'll do something you didn't anticipate and a new solution will have to be crafted anyway.

nelsona · Post by **nelsona** » Sat Nov 26, 2005 4:23 pm

When in doubt, go to the treaty:

<blockquote id="quote">quote:<hr height="1" noshade id="quote">1. Paragraphs 2(a) and 2(b) of Article XXIV (Elimination of Double Taxation) of the Convention
shall be deleted and replaced by the following:
“(a) Subject to the provisions of the law of Canada regarding the deduction from tax
payable in Canada of tax paid in a territory outside Canada and to any subsequent modification
of those provisions (which shall not affect the general principle hereof)
(i) Income tax paid or accrued to the United States on profits, income or gains
arising in the United States, and
(ii) In the case of an individual, any social security taxes paid to the United
States (other than taxes relating to unemployment insurance benefits) by the individual
on such profits, income or gains
shall be deducted from any Canadian tax payable in respect of such profits, income or gains;<hr height="1" noshade id="quote"></blockquote id="quote">

This clears things up. I guess I got a little trigger happy. You cross-border workers in Windsor can rest easy.
I would stipulte however, that even though the CRA announcement keep refering to a specific treaty coverage of FICA, no such specific use of the term FICA exists in the treaty. Even the treaty merely says social security tax.

No wonder this never crossed my desk until yesterday: it meant nothing. It did however permit me to learn as Norbert Pointed out that all SS taxes fall under FICA, which did not alaways clear to me from a Cdn perspective.

I have edited my initial post simply to remove any doubt.

nelsona non grata... and non pro

Norbert Schlenker · Post by **Norbert Schlenker** » Sun Nov 27, 2005 3:37 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by nelsona

When in doubt, go to the treaty: ...<hr height="1" noshade id="quote"></blockquote id="quote">
As well as the changes to Article XXIV, there are relevant changes to Articles II and III by articles 1&2 of the third protocol.

http://www.intltaxlaw.com/treaties/cana ... rticle%201