Bill C-305 (Historical)

An Act to amend the Income Tax Act (exemption from taxation of 50% of United States social security payments to Canadian residents)

Income Tax Act

[Mike Wallace, Conservative, Burlington, ON]

Mr. Speaker, I welcome the opportunity to speak to this private member's bill, Bill C-305, a proposal relating to the tax treatment of a very particular kind of income, the social security benefits that some residents in Canada receive from the government of the United States.

I understand that the principles, which have motivated the hon. member to craft this bill, are ones that my constituents and I support. Those principles include tax fairness for all Canadians and special consideration for our seniors who have given this country so much and deserve our full support.

Canadians who want to know what Canada's seniors have contributed only need to look around them. The entire fabric of Canadian life was built on foundations that were laid for us by those who are now in their retirement years. An obvious example is the freedom we enjoy, freedom that people in many other parts of the world would dearly love to have. We are free to speak our minds, free to worship as we choose or not at all and free to hold and enjoy property and to participate in institutions that govern us, all because of sacrifices of a generation of Canadians who are now in retirement.

We owe a debt to the senior members of our communities. Indeed, the government does a great deal for seniors right now. Old age security benefits and the guaranteed income supplement ensure that seniors are able to enjoy a basic minimum standard of living. In this fiscal year, these programs will provide over $31.5 billion to over 4.2 million, many of them low income seniors.

Seniors also benefit from a number of tax expenditures and programs that are targeted to their needs and particular circumstances. These range from a newly increased pension income tax credit, which reduces income tax paid by seniors, to the new horizons seniors program which provides financial support to community based projects for seniors. These targeted programs are in addition to the strong retirement income support that is in place: the OAS, the GIS and the financially secure Canada pension plan.

The results speak for themselves. The number of low income seniors currently is at an all time low. Bill C-305 proposes to extend the exemption from the tax credit to U.S. social security benefits from 15% to 50%. I know this measure would help many seniors in this country who worked in the United States or whose spouses worked in the United States and now qualify for these benefits. However, I also know that the taxation of these benefits has a long and complex history involving lengthy negotiations between the Department of Finance and the U.S. treasury department.

Let me explain by providing some background on the taxation of social security benefits as set out in the Canada-U.S. Tax Treaty and why it is that Canada agreed to the 15% exemption. As I have mentioned, this history has been complex and the current state of affairs represents a delicate balance between competing interests.

The Canada-U.S. Tax Treaty has included rules for the taxation of social security benefits paid by one country to residents of the other country since 1984. The evolution of these rules has progressed in three distinct phases.

First, between 1984 and 1996 the treaty contained a residence based taxation rule; that is, only the country of residence was allowed to tax social security benefits. During this time, a resident of Canada receiving U.S. social security benefits would only pay tax to Canada. There was, however, a 50% deduction in computing taxable income in respect of these benefits because at that time the U.S. only taxed a maximum of 50% of the U.S. social security payments. This represented a tax advantage over Canadian benefits which were fully subject to tax. In addition, U.S. residents receiving Canadian benefits were not subject to Canadian tax and benefited from the 50% maximum inclusion rate in the United States.

One consequence of this was that high income U.S. taxpayers were not subject to the clawback of old age security benefits which applies to Canadian taxpayers with incomes above a certain amount. This residence based rule was seen to be unfair.

At the time, the public called for the rules to be changed so that all participants of Canadian benefits were taxed in the same way, regardless of residence, and the rules were changed. In 1995, Canada and the United States agreed to replace the residence based rule with a source based rule. In other words, the new rule would allow only the country from which the payment arose to tax that payment. The result was that a Canadian resident receiving U.S. social security benefits was taxed only by the United States.

In addition, the maximum inclusion rate under U.S. law had risen over time from 50% to 85%. A U.S. citizen in receipt of a U.S. benefit would be subject to ordinary U.S. rates only on a maximum of 85% of that income. If the recipients were Canadian residents, they would either pay U.S. rates if they were a U.S. citizen or they would be subject to a final withholding tax of 25.5%. This rate was computed at 85% of the standard U.S. withholding rate of 30%. This was a final tax and was non-refundable.

For high income Canadians, this tax was usually acceptable since, if they had to pay tax in Canada on this income, their marginal rate of taxation would likely have been higher than 25.5%. However, for low income taxpayers who otherwise rely on the progressive nature of the Canadian tax system to fairly distribute the tax burden, the 25.5% withholding tax constituted excessive taxation and caused, in many cases, severe hardship.

These taxpayers, had they been subject to tax in Canada on this income, would have paid little or no tax. Because they were subject to U.S. taxation, a quarter of their income was lost. Conversely, a U.S. resident receiving Canadian benefits under this rule could choose between a 25% withholding tax or, if they filed a tax return in Canada, a graduated income tax at ordinary rates. For low income U.S. taxpayers, this meant they paid little or no tax. At that time there was a great discrepancy in the taxation of these benefits to the detriment of many low income Canadian seniors.

Canada and the United States recognized this unfair treatment and we came together again to change the rules. To relieve hardship on low income Canadians, we agreed to restore residence only taxation. The current rule provides that social security payments are taxed as if they were payments from the home country's benefit plan.

A Canadian recipient of U.S. social security is treated as if the payment were from CPP, QPP or OAS. U.S. recipients of CPP, QPP or OAS are treated as if they were receiving U.S. society security benefits. This meant that Canadians receiving U.S. benefits could avail themselves of the graduated rate of our taxation system and were no longer subject to the flat 25.5% withholding tax.

As I mentioned, the maximum inclusion rate in the United States had changed from 50% to 85%. That is the history of the taxation of social security benefits between Canada and the United States. As this history reveals, it is a complicated issue that is related to the negotiations of our most important tax treaty.

I thank the hon. member for tackling such a complex issue and for working hard to represent the seniors and retired people, not only in his constituency but also in mine, as I have many residents who live in the riding of Burlington who receive both a Canadian pension and a U.S. pension.

I appreciate all the support I have heard so far this morning on this item. I look forward to having it go to committee so we can debate this further and get the proper representation from those who are truly affected on a daily basis by this measure.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Mr. Speaker, I rise on a point of order. There have been consultations among all parties in the House and I believe you will find there is unanimous consent for the following motion. I move:

That Bill C-305 be sent to the Standing Committee on Finance after the second hour of second reading, on division.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Mr. Speaker, I would like my colleague to repeat the name of the bill because I did not have the same information as he did. I am sorry, but could he just repeat the name of the bill so that we will know whether or not we agree to the motion?

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Mr. Speaker, I apologize if the member did not hear me correctly. It is Bill C-305.

[The Acting Speaker, Royal Galipeau]

I appreciate the point of order. I wonder if it is timely since the debate on this bill is not yet complete.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Mr. Speaker, we are putting forward this proposal now after consultation with all parties in the House. We recognize that it might be in order now due to the general concurrence of all parties in the House.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Mr. Speaker, am I to understand that the motion will be voted on at the end of the time allowed for debate so that anyone who wishes to speak may do so within the time provided?

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Mr. Speaker, it would apply after the second hour of debate.

[The Acting Speaker, Royal Galipeau]

Does the hon. member have unanimous consent to move his motion?

[Some hon. members]

Agreed.

[The Acting Speaker, Royal Galipeau]

The House has heard the terms of the motion. Is it the pleasure of the House to adopt the motion?

[Some hon. members]

Agreed.

[The Acting Speaker, Royal Galipeau]

(Motion agreed to)

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Speaker, I am very pleased to congratulate the hon. member on his private member's bill. As my colleague from Scarborough—Guildwood pointed out, we in the Liberal Party are certainly very happy that this bill go to committee, as I think we have already agreed. We think that tax fairness is a matter of primary importance. We think that this bill may be appropriate in terms of enhancing tax fairness, but we are not quite sure. We need to have further information which we think the finance department will be able to provide when this bill goes to committee.

Just to reiterate the general point about tax fairness that was made by my colleague, I will not repeat the summary of the bill because that has already been done by a number of speakers, but let me spend a few minutes focusing on the fairness issue.

We take the example where there are two neighbours. Neighbour A receives social security payments in 2006 which are taxable by his country of residence, which is Canada. The Government of Canada allows him to exempt 15% of those payments from his taxable income. If neighbour A were to receive a $100 U.S. social security cheque, he would only have to pay tax on $85 of that money. That is fairly clear. Now we can consider his neighbour who is a Canada pension plan recipient with a similar total income. When neighbour B receives his $100 CPP cheque, he has to pay tax on the entire $100.

If we are talking about tax fairness, it would seem that the two neighbours with a similar amount of income should pay a similar amount of tax on their government pension plans. It is a matter of very simple fairness that two neighbours with like incomes should be treated in a like manner by the tax system. What this bill proposes to do is to lower the amount that neighbour A would count as taxable income from $85 to $50 for every $100 of social security that he receives.

Where does this 50% exclusion rate come from? This is the nub of the matter and the essence of the bill. Was it just pulled out of the air or is there some analytical foundation to it? Is it an attempt to return to the 1980s when only 50% of social security payments were counted as taxable income?

It would seem that this bill is striving to ensure tax parity between Americans who receive a CPP pension and Canadians who receive social security. It does not seem to have tax fairness between Canadian taxpayers at its heart. It would seem to me at least on the surface that what the bill should try to do is ensure that Canadians in like circumstances pay similar amounts of tax on their pensions whether they be social security or the Canada pension plan.

That being said, that is a simple example and a general point of principle, but I do not have the figures in front of me to give a proper answer to the question. I would certainly be interested to know if in fact social security recipients are worse off than their CPP counterparts.

For this reason, I will be voting for this bill at second reading, with the view of getting these numbers during the committee's examination of the bill. The Department of Finance has a lot of expertise and should be able to provide the committee and through it this House with an accurate picture of the difference in the tax burden borne by the social security recipients versus the Canada pension plan recipients.

If there is an unfairness here and social security recipients are indeed being taxed more, then I agree and I am sure my colleagues would agree, that it should be rectified, but it should be rectified by a real number and not a number that appears to be arbitrary. Since it is a round number, 50%, it somewhat raises the suspicion that perhaps this number has been pulled out of the air. Perhaps it does not, but that is why we want to send it to committee, to try to get facts from the Department of Finance. The U.S. does not use that system based on 50% any more. That raises another question about why the number of 50% has been used.

Once again I would like to congratulate the hon. member for Essex on his bill. Tax fairness is something we must always strive to deliver for Canadians. It was on the basis of tax fairness that we preferred our income tax cut rather than the government's GST cut. That is another example of tax fairness because the Liberals' income tax cut was only at the lowest income level. The maximum benefit that any Canadian, no matter how rich, could get was in the order of $300, whereas the GST cut, if a person is very rich and buys a yacht or an expensive car, they would receive more than a $300 benefit with that single purchase.

That is another example of tax fairness. We on this side of the House argued very strenuously, and ultimately we did not have the votes, but we certainly argued strenuously on the grounds of tax fairness for an income tax cut to the lowest level rate rather than a GST cut.

We are all in favour of tax fairness. I am sure the hon. member is in favour of tax fairness in principle too. It is difficult to oppose it in principle.

When Bill C-305 goes to committee and we find that the member's bill does indeed move in the direction of greater fairness in the tax system, then we on this side of the House would most likely support the bill, but we do not have those facts yet. That is why we are voting to send the bill to committee where it will have greater scrutiny and we will have greater access to the facts of the matter.

[Brian Masse, NDP, Windsor West, ON]

Mr. Speaker, I would like to begin my remarks by congratulating the member for Essex for his hard work on this file. It has been one that he has pursued in opposition and now in government, and we have yet to have the results that we want.

The bill has had a number of different opportunities to move forward and has not made it yet. However, the member for Essex has always been pursuing this very important issue not only in terms of fairer taxation as described in Bill C-305 but also as a social justice issue. We have citizens across the country who are being unfairly taxed because laws have changed and have had an impact on their daily income and livelihood. It has created a considerable amount of grief, angst and a number of their plans have changed which has been rather unfortunate.

It is important to recognize that in the Windsor-Essex County we have many seniors who had previously been paying social security taxes to the United States and work over there on a regular basis even to this day. We have thousands of nurses for example going to the United States from Canada every day.

Ten years ago when this change was enacted in the tax treaty law, it basically usurped the traditional taxation that they had expected to receive when they got their social security upon retirement. It is not just Windsor-Essex County. This affected individuals in British Columbia, the Atlantic provinces and individuals who have worked in the United States from across Canada. It is not just our area, although we do have a significant number there but it is important to all Canadians.

It is important to note that it seems that this bill will go forward with the unanimous consent of the House to the finance committee where any questions about the bill will be resolved. I hope it will be passed quickly by the finance committee and sent back to this Chamber, and finally to the Senate to be ratified.

When Canadians are looking at Parliament, they look for opportunities for all parties to work together on issues. We have demonstrated that there is common support for this legislation. The previous administration had problems acting on this which led to some of the current delays that we have today. However, if we can put that behind us and move the bill forward and pass it quickly, Canadians will be rather pleased to see something come from this Chamber that is supported by all and is going to benefit all Canadians.

This is a bill that will cost Canadians some money, but we need to put the bill in perspective. It may cost perhaps $25 million, but it will go back to seniors who should not have lost that money to begin with and this is a government that had over $13.5 billion to put on the debt unilaterally. There is the financial capability to rectify this injustice.

The Chamber passed a seniors charter of rights, which was an NDP motion. It called for fairness, equity and respect for seniors when bills come through the Chamber that relate to them. This bill fits that mould. Therefore, I think there is a greater onus on the Chamber to move the bill quickly through the system.

I have had a number of opportunities to talk to constituents and it is important to put a face to the effects of what has happened. They have watched their savings and earnings disappear because of this change and what has been sad is that some of these people have passed away. The original tax treaty that was changed when this problem emerged goes back to 1996 and it has been 10 long painful years for individuals who had expectations eroded and eliminated as the amount of income they would have coming back to them has been affected.

We have heard from different constituents who have had to change their lifestyles. Some have had to sell their homes or go to a different lifestyle option that they did not want to do or have not been able to support their grandchildren the way that they wanted to because they are literally losing hundreds of dollars per month. This was part of their calculated income which they expected to receive.

These are law-abiding citizens who crossed the border for years and worked in the United States and brought those earnings back to Canada. They were very good citizens to the country, have retired here, and are contributing in many different ways. To have this happen has been very frustrating to watch. They have heard a lot of rhetoric over time about this being fixed and their expectations of Parliament are warranted to have this bill move quickly through the process.

I am going to read a letter which encapsulates the debate we have had here today and it is important that Craig Ridsdale does get noted. He has been an outspoken voice on this issue and he wrote a letter called “unfair tax laws burden seniors”:

Many Canadian seniors across Canada have been sitting on their hands since 1997 waiting for the Liberal government to move forward on a pledge made to them to rectify a system of taxation that threatens to leave many of them, particularly low income seniors, in a very difficult financial situation.

In 1984, the Canada-U.S. Tax Convention Act was implemented, primarily to protect the citizens of both countries from being taxed twice on their pensions, be they social security in the States or the Canada (and Quebec) Pension Plan here in Canada. However, differences in our taxation systems (Canadians pay taxes when collecting benefits while Americans pay the taxes on their contributions) has meant that Canadians receiving social security benefits were being taxed twice.

A series of protocols to amend this bill have made matters even worse for many retirees. Specifically, the third protocol, implemented in 1995 and applicable for the 1996 fiscal year allowed the United States government to charge what amounted to a more than 25% withholding tax on Canadians' pensions. Previously, the second protocol to this treaty allowed only the country of residence to tax social security benefits. For many retired Canadians who paid into the American system over the span of their working lives what this meant was that over one quarter of their income essentially disappeared overnight.

The fourth protocol, implemented after the disastrous third protocol, allows the Canadian government to tax 85 % of social security, and increase from the 50% agreed upon in the 1984 act. It also provided the government with the latitude to reduce the 85% limit which it has refused to do.

Since 2001, Canadians Asking for Social Security Equity (CASSE) have been lobbying the federal government to either restore the second protocol or at the least grandfather its provisions to include all seniors who were negatively affected by the third protocol. To this date nothing has been done.

Nothing has been done, aside from a number of bills that have made it to the finance committee in different machinations.

In conclusion, I want to note that this is very important. The expectation of Canadians is that when we do have bills which are generally supported in this chamber by all parties, they should move forward rather quickly. It is important that this work is done. It is about fairness and justice for senior citizens who had expectations and the country changed those things. That unfair inequity must be rectified. The New Democratic Party is committed to seeing this bill move forward, not only through the finance committee but as quickly as possible to final ratification, so our seniors are treated with the equity and fairness that they so justly deserve.