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