Revenue Ruling 85-21: U.S. Social Security Tax in Canada

Revenue Ruling 85-21 clarifies the tax rules for United States citizens in Canada who receive U.S. Social Security benefits. The ruling interprets the U.S.-Canada income tax treaty, concluding these benefits are taxable only in the country of residence. For a U.S. citizen residing in Canada, their Social Security income is subject to Canadian tax but is exempt from U.S. income tax, a policy that prevents double taxation.

U.S. Tax Treatment Under the Treaty

The United States taxes the Social Security benefits of its citizens based on their “provisional income,” which includes their modified adjusted gross income plus half of the Social Security benefits received. If this amount exceeds certain thresholds, a portion of the benefits becomes taxable. For a single filer, if provisional income is between $25,000 and $34,000, up to 50% of benefits may be taxed; if it exceeds $34,000, up to 85% may be taxed.

This tax treatment is overridden for residents of Canada by the U.S.-Canada income tax treaty. Article XVIII(5) of the treaty grants the country where the recipient resides the exclusive right to tax these payments. Therefore, for a U.S. citizen residing in Canada, the treaty assigns sole taxing jurisdiction to Canada, making the benefits exempt from U.S. federal income tax and ensuring the income is taxed only once.

Canadian Tax Treatment of U.S. Benefits

U.S. Social Security benefits are fully subject to Canadian income tax for residents of Canada and are treated as pension income on the Canadian T1 General income tax return. Canadian tax law requires that all foreign-source income be reported in Canadian dollars. Taxpayers must convert the gross amount of U.S. Social Security benefits using the exchange rate in effect when the income was received or use the average annual exchange rate from the Bank of Canada.

For Canadian tax purposes, 85% of the U.S. Social Security benefit is included in the recipient’s taxable income, as taxpayers can claim a 15% deduction. This net amount is then combined with the taxpayer’s other income and taxed at their marginal rate. Recipients should keep accurate records of the gross benefits paid, detailed on Form SSA-1099, Social Security Benefit Statement, for accurate reporting.

Reporting Requirements for U.S. Taxpayers

To claim the treaty exemption, a U.S. citizen in Canada must still file a U.S. federal income tax return, Form 1040, if they meet filing thresholds. On the return, the taxpayer reports the gross amount of Social Security benefits received on line 6a and enters $0 as the taxable amount on line 6b. It is recommended to write “Exempt per U.S.-Canada Treaty” on the dotted line next to line 6b to inform the IRS of the exclusion.

While some taxpayers file Form 8833, Treaty-Based Return Position Disclosure, to formally document their position, its necessity is not always clear. IRS guidance has provided exceptions for reporting Social Security benefits under a treaty. Filing Form 8833 may provide added clarity but is not always required for this specific treaty benefit.