TN 12 (09-98)
GN 05010.160 Tax Treaties With Canada
1. Benefits Paid Before January 1996
Benefits paid before October 1984 (for months after November 1983) to alien beneficiaries residing in Canada were taxed at a rate of 7.5 percent (i.e., 15 percent of one-half of the benefits).
A tax treaty finalized in August 1984 exempted benefits paid after September 1984 to alien residents of Canada from the withholding tax.
2. Benefits Paid After December 1995
In 1995, the tax treaty was changed to eliminate the exemption to the nonresident alien withholding tax. As a result, the Social Security benefits paid on or after January 1, 1996 to alien beneficiaries residing in Canada were subject to the alien withholding tax. Tax was withheld from the benefits of most beneficiaries beginning with the January 3, 1996 payment. However, because of a coding problem that was not identified until after the January change, some beneficiaries were not identified and did not have tax withheld from their benefits until the June 3, 1996 payment.
In December 1997, a Protocol to the tax treaty was ratified which exempted alien residents of Canada from the withholding tax. The Protocol provides that Social Security benefits are taxable by the country in which the beneficiary resides. It was retroactive to January 1, 1996 and effectively reversed the results of the change made in 1995.
Beneficiaries were advised of the Protocol and its effect in February 1998. The change appeared in the payment dated March 3, 1998 and SSA refunded any taxes withheld in 1998.
Benefits paid to alien residents of Canada are exempt from the nonresident alien withholding tax.
2. Refund of Taxes Withheld from Benefits in 1996 and 1997
Under the provisions of the 1997 Protocol, Revenue Canada (RC) (working with IRS) refunds taxes withheld in 1996 and 1997, as explained in GN 05010.160C. SSA has no jurisdiction in this matter other than to answer questions and to provide information about the amount of taxes withheld and the benefits paid in 1996 and 1997.
Beneficiaries do not have to file for tax refunds for 1996 and 1997 made by RC or for tax refunds for 1998 made by SSA.
1. Tax Refunds by RC
RC will handle the tax refunds for 1996 and 1997 separately.
IRS provides RC with information on the taxes withheld and benefits paid in 1996 and 1997 to beneficiaries living in Canada. RC compares this information with its data base to determine if the beneficiary has any additional Canadian tax liability. It computes the additional tax, if any, owed RC and files an electronic tax return with IRS on behalf of the beneficiary. RC issues the refund (in Canadian dollars) to the beneficiary in accordance with Canadian law.
No beneficiary will have to pay an additional Canadian tax greater than the amount of the taxes withheld from his/her Social Security benefits.
RC will send a notice to each beneficiary who does not get a complete refund, explaining why he/she will not receive a refund or will receive a refund which is less than the full amount which was withheld from his/her Social Security benefits.
2. Tax Refunds by SSA
Since SSA stopped tax withholding with the payment dated March 3, 1998, it refunded any taxes withheld in 1998 to the beneficiary in a separate check.
Advise beneficiaries who ask why RC, not SSA or IRS, makes the tax refunds for 1996 and 1997 that this authority was given to RC by the Treasury Department which negotiates tax treaties. SSA does not have any jurisdiction in these matters.
Advise beneficiaries that questions about refunds or the refund process for 1996 and 1997 should be referred to any Revenue Canada office.