PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
1. What Canadian Payments Are Affected By The Proposed Changes To The Convention?
The proposed changes affect social security benefits paid by one country to a resident of the other country. In the case of Canada, this means any benefit or supplement paid under the Old Age Security Act (OAS), and any payment under the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). In these questions and answers we use the term "Canadian benefits" to refer to all of these benefits.
2. How Are Canadian Benefits Paid To U.S. Recipients Currently Taxed?
Since January 1, 1996, when social security benefits became taxable exclusively by the country paying the benefit, non-resident recipients of OAS, CPP and QPP have been subject to non-resident withholding tax of 25%. U.S. residents can, however, choose to file a Canadian income tax return, and pay tax on their Canadian benefits (and some other kinds of income) at the same rate as a resident of Canada. For low-income individuals this generally results in a tax rate lower than 25%. In addition, higher income U.S. residents are currently subject to recovery tax on OAS benefits.
3. How Will These Benefits Be Taxed Under The Proposed New Rule?
Under the proposed changes, OAS, CPP and QPP paid to a resident of the U.S. will be taxable only in the U.S. There will be no withholding or filing requirement in Canada with respect to OAS, CPP and QPP. U.S. residents should contact the Internal Revenue Service (IRS) with questions about the tax treatment of OAS, CPP and QPP in the U.S.
4. I Live In The U.S. And I Have Paid Canadian Tax On My Canadian Benefits. When Will I Get A Refund?
The proposed agreement (known as a protocol) will become law only when it has been signed and ratified in both countries. You should be able to get your 1996 refund shortly after the protocol has been ratified.
5. Which Government Will Refund My Canadian Tax?
Canada will refund the Canadian tax on your Canadian benefits. To apply for a refund, you will use a special Revenue Canada form. You should receive the form in the mail shortly after the protocol is ratified. If you do not, you can get a copy from Revenue Canada.
6. How Much Tax Will I Get Back?
Canada will refund all of the tax Canada has collected on Canadian benefits paid to all U.S. residents who apply. However, those who apply will be subject to U.S. tax on their Canadian benefits, instead of Canadian tax. For more information about United States tax rules and how the refund will work in your particular case, you should contact the United States Internal Revenue Service (IRS).
7. Will This Change Affect My 1996 Canadian Tax Return?
It will not affect how you complete any income tax return you file in Canada for 1996. If you have not already filed a 1996 return, you should do so according to the present law. Any Canadian tax you pay on your 1996 Canadian benefits will be refunded to you once the proposed protocol has been signed and ratified.
8. What Do I Have To Do Differently Now That This Change Has Been Announced?
Until the protocol is ratified, neither the way your benefits are treated nor the forms you must file will change. Human Resources Development Canada will continue to withhold non-resident tax from OAS, CPP and QPP benefits.
To continue receiving OAS benefits after June 1997, U.S. residents should still file the 1996 Old Age Security Return of Income (OASRI).
If you obtained a reduced withholding rate for 1996 by filing form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld, you should file the required Canadian income tax return by June 30, 1997.
While we expect the protocol to be ratified before 1998, it may be delayed. In order to qualify for a reduced rate of withholding in 1998, you should file form NR5 in the fall of 1997.
9. My OAS Benefit Was Suspended Because My Income Was High (Or Because I Did Not File The OASRI). Will It Be Reinstated Automatically?
If you filed the 1995 OASRI, and your benefits stopped due to high income, your OAS benefit will automatically restart after the Protocol is ratified. If your OAS benefits stopped because you did not file the 1995 OASRI, you should contact Human Resources Development Canada to have your benefits resumed.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your Coopers & Lybrand advisor, or:
David W. Steele PricewaterhouseCoopers 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
Click Contact Link