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)

The purpose of this enactment is to reduce from 85% to 50% the inclusion rate on United States social security payments received by Canadian taxpayers.
The “inclusion rate” is the percentage of United States social security payments to be included as income by a Canadian taxpayer. The Canada-United States Tax Convention Act, 1984 provides for 15% of such payments to be non-taxable in the hands of Canadian residents, thus resulting in an 85% inclusion rate.
This enactment provides for an additional 35% of United States social security payments to be excluded from taxable income. The enactment therefore increases the exemption to 50% and decreases the inclusion rate to 50%.

Income Tax Act

[Diane Ablonczy, Conservative, Parliamentary Secretary to the Minister of Finance]

Mr. Speaker, I welcome this opportunity to comment on Bill C-305. The subject of the bill is the income tax treatment of social security benefits that some residents of Canada receive from the government of the United States.

I applaud my colleague, the hon. member for Essex, for his initiative to provide a higher standard of living for Canadian retirees. Indeed, this government has taken action directly to raise their standard of living. It is, of course, important to approach such issues in a disciplined and focused manner. We have to set priorities and take action where we see the potential for the greatest gains overall, gains in terms of fairness, gains in terms of raising standards of living, and gains also in terms of unleashing Canada's long term economic potential, something that will be essential if we were to guarantee secure support for all tomorrow's seniors and today's seniors as well.

One of this government's key priorities is tax relief. Canadians have been shouldering an unduly heavy tax burden for far too long, but we are working hard to lighten that load. In budget 2006 we delivered on our promise to double the pension income that can be claimed tax free to $2,000. This relief will benefit the nearly 2.7 million taxpayers who receive eligible pension income and it will take 85,000 of them completely off the tax rolls. That is certainly not all. Retired Canadians, like other Canadians, will benefit from many of the tax relief measures in our first budget. This includes dropping the GST rate by one percentage point to 6%, effective last July 1.

The GST cut will make a real difference to Canadians. In fact, it will benefit all Canadians by close to $9 billion over two years, even those who do not earn enough to pay personal income tax. In fact, the National Anti-Poverty Organization, as well as academics and think tanks have undertaken research on the distributional effects of various tax cuts. They have found that lower income families pay about 8% of the money collected from the GST, but only half a per cent of income taxes. Conversely, the richest families, those with incomes over $100,000, pay about 4% of all GST and 10% of income taxes.

In consequence, according to the National Anti-Poverty Organization, the general principle is clear. Families with incomes under about $50,000, which include many, many seniors, will gain more benefit from reductions in the GST than from reductions in income tax.

Also, even though we reduced the GST rate, we have kept the GST credit at current levels to further protect low and modest income Canadians, including seniors. In fact, including the GST cut, budget 2006 delivered almost $20 billion in tax relief for individual Canadians over two years. That is more tax relief in one budget than in the last four budgets of the previous government.

All Canadian taxpayers, including seniors, will benefit from permanent increases in the basic personal amount, the amount of income Canadians can earn without paying federal income taxes. By 2009, this amount is legislated to reach $10,000.

All taxpayers will also benefit from the permanent reduction to 15.5% in the lowest personal income tax rate. This is the rate that applies on the first $36,400 of income.

Providing a secure retirement for seniors will also mean investing to ensure a strong, productive and growing economy in the future. It is vitally important that Canada's economy is poised to meet the challenges of an aging population in an increasingly competitive economy. Again, this government is taking action, focusing our investments on the highest priorities.

Budget 2006 proposed measures to help federally regulated, defined benefit pension plans make an orderly return to full funding while protecting the security of pension benefits. Budget 2006 also took important steps toward building a competitive tax system. This is a key priority if Canada is to continue on the path to more and better jobs and stronger economic growth.

For a start, we delivered on tax relief that was only promised by others, but never delivered. In particular, we eliminated the federal capital tax as of January 2006. We will eliminate the corporate surtax, starting in 2008. We will reduce the general corporate tax rate. These proposed reductions will allow Canada to regain the solid statutory tax advantage that we had prior to the 2004 tax changes in the United States. This is important since 85% of Canada's trade, and we are a trading nation, is primarily with the U.S.

In terms of health, budget 2006 provides $1 billion over the next five years to improve Canada's ability to respond to a pandemic or other health emergencies to which seniors may be particularly vulnerable. We have set aside an additional $52 million per year for the next five years to implement a Canadian strategy for cancer control.

Finally, seniors deserve to feel safe in their homes and communities. The 2006 budget provides over $200 million in funding to vigorously combat crime. This includes funding to hire an additional 1,000 RCMP officers and federal prosecutors. It includes enhanced training for the RCMP and also provides funding for crime prevention in communities.

Early in my remarks I flagged the importance of identifying priorities and acting on them. All the things I have mentioned, reducing the tax burden, increasing spending on health and on ensuring safety in our communities, including ensuring that our economy continues to flourish, and supporting the benefits we provide to seniors and to other Canadians, are very important. We must ensure that we not only identify priorities but have the importance to act on them as well.

This brings us back to the private member's bill before us today. My hon. colleague from Essex has raised an important issue. We believe this issue deserves to be considered, along with many other potential budget priorities that are on the minds of each and every member of the House. The goal must always be to proceed in a fair and balanced way for all seniors and for all Canadians.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. Speaker, I am happy to speak about this issue today. I also had the opportunity to talk about Bill C-265.

This is not the first time a bill on taxing social security payments has come before this House. In November 2004, my Conservative colleague was on this side of the House, and we shared his joy when his spouse gave birth to a child. Naturally, we congratulated him.

Today, I congratulate him on again raising this issue by introducing Bill C-305. The purpose of this bill is to reduce the tax rate from 85% to 50% for Canadians and Quebeckers who receive United States social security payments.

At first glance, this bill might not seem very important. But this issue affects thousands of Quebeckers and Canadians. For over 20 years, we have been looking for an equitable way to solve the legislative problem facing Quebeckers and Canadians.

Why could Canadian and Quebec citizens who receive payments from the American government not benefit from the same conditions as American citizens who receive a pension from the Canadian and Quebec governments?

To help members understand where we are at today, I will give some background on this issue. Four protocols have been negotiated between the United States and Canada. I want to talk about the fourth protocol, signed in July 1997 with a number of other countries, including the United States. Under this protocol, only the country of residence is able to tax social security benefits. Since then, Canada has been able to tax American benefits paid to residents of Canada and Quebec.

The problem is that the protocol gave Canada, under the U.S. Social Security Act, the right to increase the tax rate from 50% to 85%. Bill C-305, before us today, would correct this situation.

The Bloc Québécois supports the bill, because it rectifies an error the previous government made in 1997. Several thousands of Quebeckers left their families to go work in the United States, often for years, and have been punished by the provisions of this legislation. These are people who, in many cases, were close to their roots and did not want to leave their country for the United States.

The 1997 legislative amendment enabled the federal government to bring in a lot more revenue at the expense of a population that could be considered vulnerable and economically weak. It is important to understand why Bill C-305 is now before the House and how it corrects a past blunder.

As I mentioned, historically, four protocols have modified the Canada-United States tax convention. In 1980, the income tax convention provided that social security benefits are taxable only in the originating country. It was only sometime later that the benefits were initially taxed in the United States.

The portion of benefits deemed taxable rose from 0% to 50%, depending on the taxpayer's net revenue and when the benefits were paid.

Modest income families and individuals were generally exempt from paying taxes on their benefits. In March 1984, a second protocol modified the Canada-U.S. tax convention. This agreement made social security benefits taxable only in the taxpayer's country of residence. From then on, 50% of the benefit amount was exempt from taxation.

For example, an American citizen residing in Canada was taxed on 50% of the benefits received from the United States. Bill C-305 is designed to return to this situation.

A third protocol was signed in March 1995. It gave the country paying benefits under social security legislation the exclusive right to tax those benefits.

This means that the United States taxed social security benefits paid to Quebec and Canadian residents at a rate of 25.5%, while Canada did not tax benefits received by American taxpayers.

Finally, the fourth agreement to amend the tax treaty was signed in July 1997. It provided that benefits paid under U.S. social security legislation to a resident of Canada would be taxable only in Canada, as if they were benefits under the Canada Pension Plan, except that 15% of benefits were made tax exempt in Canada.

Under this agreement, the tax rate became 85% of the payments made to Canadian residents.

However, the last agreement provides that the benefits paid under Canada's social security legislation to a resident of the United States are taxable only in the United States.

Essentially, the purpose of Bill C-305 is to reduce from 85% to 50% the tax rate on United States social security payments received by Canadian taxpayers.

For over 20 years now we have been trying to find a fair and equitable solution for all Quebeckers and Canadians dealing with this problem.

Thousands of Quebeckers and Canadians live near the border and have been suffering the never-ending repercussions of these tax reforms over the past 20 years.

Of course, this measure does not come without a price, but it is a small price to pay considering the thousands of people who have sacrificed their lives and their families to work far from home and their loved ones. These people wanted to stay here and keep their identity.

We, the Bloc Québécois, support lowering the tax rate on benefits paid to taxpayers, from 85% to 50%, because it corrects certain injustices. For this reason, I would like to congratulate the hon. member for his bill, which we will support.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, I am pleased to speak to Bill C-305, which has been before Parliament before. I took the opportunity to look back at some history and noticed that this bill passed at second reading and was sent to committee where it died. Some members of Parliament are fortunate enough to get high enough in the lottery so their bills can be considered, but I have a great deal of sympathy for those members who face the worst possible outcome of not getting them through the entire legislative process before an election is called.

Bill C-305 raises an important question. I think the member has a reasonable argument but he will need to convince members about some of the differences that have occurred since the time we entered into a tax treaty with the U.S. in 1984.

Before I became a member of Parliament, I had a CA practice in which I did tax returns mainly in Canada but had some experience with United States returns. The member will know that the tax systems between the two countries are very different. The Americans charge a capital gains tax on the sale of a home, but they also have mortgage interest deductibility. They have deductions for taxes paid to other jurisdictions. They also have joint filing for couples. However, members should understand that it is not the filing of one tax return for two people using the same tax tables as one person. It is a separate schedule of taxation for joint filers. It is not exactly seamless but at least it is a bit better than what we have here.

I would not even try to do a quantitative analysis about the tax burden between Canada and the U.S. Our health care system is paid by our tax dollars, whereas it is not in the United States. The cost of buying health insurance in the United States is very prohibitive for many people. I just want to point out that there are some differences.

Interesting enough, the tax treaty treatment of U.S. social security payments received by Canadians who worked in the U.S. and are eligible for U.S. social security are outside the ambit of the traditional tax treaty treatment.

Something that is important for members to acknowledge is that this is not a simple issue. It is a complex issue. Members need to understand where we started so that when we look at where we end up to determine whether or not there is an inequity compared to where we started as opposed to whether there is an inequity compared to somebody else? That happens to be the crux of the issue here.

The member's argument has basically been that people receiving U.S. social security were treated in a certain way back in 1984 when in fact they were taxed in the country in which they were resident. Any payments received from the United States were taxed in Canada. It had a 50% exclusion rate which meant that if someone received a U.S. social security benefit of $100, they person only had to include 50% of that in his or her Canadian income tax return.

That changed in 1996 when the third protocol was negotiated. It was decided to change where the taxation would occur. It was changed so that a Canadian receiving a U.S. social security benefit would actually be taxed in the United States which had a withholding tax of 25.5%. I could go into the details of how the differences were worked out but I do not believe that is the fundamental issue.

The member referred to what happened on April 9, 1997 when the fourth protocol was negotiated with the United States. It reverted back to where the tax benefit would be taxed in the country of residence. However, it did not restore the 50% exclusion rate that was in the 1984 tax treaty.

Therefore, we have a situation where in 1984 only half of U.S. social security payments were included in Canadian income taxes. In 1997 it was all included, except for a 15% exclusion. This was basically to mirror the withholdings that generally would happen when a United States corporation would pay, for instance, investment income to a Canadian where there was withholding at source.

If we look at some of the machinations that the finance department had to go through in terms of the tax equity between two countries in dealing with payments to non-residents or to foreign jurisdictions, we can see that it really is not very easy to explain. One of the things I conclude from this is that the inequity the member is referring to is the fact that back in 1984 there was a 50% exclusion rate. He would like to have it back now because in both instances individuals were taxed in the residence of the person who received the money. That is a non sequitur. It does not follow because there were other things that were taken into account.

The inequity is not an inequity between a Canadian receiving U.S. social security payments and an American receiving Canada pension plan payments. Argument has been made that, and if we look at the Debates from the last Parliament, the Americans have a different system. They have to make $59,000 before they have to start including any, and even then there is an exclusion rate.

Why are we comparing, or trying to compare, Canadian tax burden to U.S. tax burden for the same receipt of U.S. social security payments? It is not possible to do that in a clear fashion. In fact, here is the real comparison that we should be looking at. If a Canadian receives a Canada pension plan of $100 and has to include that $100 in his or her income tax return, why is it that a Canadian receiving U.S. social security payments should only include one-half of the amount in the Canadian income tax return?

In fact, two people receiving a $100 benefit, one paid by Canada and one paid by the U.S., would be treated totally differently. In fact, the inequity that is being proposed by this bill would increase, but if we make the argument about a Canadian receiving U.S. social security compared to an American receiving social security, it is suggested that we should have this changed so that it gets us back to what we had in 1984.

Members can see this is very convoluted. Having said that, this issue has gone on for some time and I do know that the member and many members in this place have expressed some concern about the tax burden of Canadians who receive foreign pension payments. It is not possible to actually explain it to members in the two hours of debate.

I suspect that there may be an appetite for this matter to go to the finance committee to get the full details out. The finance department has to explain all of the implications that it took into account in negotiating for separate protocols since 1984 on how to deal with these matters.

Further, I would respectfully suggest to the member that in consultation with finance officials, he may be able to provide members with some analytical samples which could show, in very simple terms, the difference in the tax burden today between a Canadian receiving CPP and a Canadian receiving U.S. social security payments.

He may also want to consider that, in my view and I think many share it, the best outcome of a private member's bill is to get the government to adopt it as its own and to make appropriate other consequential changes, or maybe inconsequential changes, which will make absolutely sure that there is as little inequity between taxpayers as possible.

[Jeff Watson, Conservative, Essex, ON]

moved that Bill C-305, An Act to amend the Income Tax Act (exemption from taxation of 50% of United States social security payments to Canadian residents), be read the second time and referred to a committee.

Mr. Speaker, I am very pleased to rise today to speak to Bill C-305, an act that is designed to lower from 85% to 50% the inclusion rate for the amount of income taxable for Canadian seniors who collect the U.S. social security pension.

I spent a lot of this past weekend in reflection, thinking about things that are important. I thought back to about 10 years ago and how very different things were for me, when I was unmarried and worked at a job scrubbing giant inflatable balloons as they came back from parades. Ten years later, some things have changed in my personal life. I am now married with four kids. I am no longer scrubbing inflatable balloons but have the great privilege of being a member of Parliament representing the communities of Essex.

Sadly, 10 years later some things have not changed. Bill C-305 exists because an injustice was committed a little more than 10 years ago and still needs to be righted.

As I said earlier, Bill C-305 is about lowering the inclusion rate from 85% to 50% for retired Canadian seniors who collect a U.S. social security benefit. This follows on the heels of two previous private members' bills, one by the member for Calgary Southeast and my own private member's bill in the last Parliament, Bill C-265, which passed second reading, as members of the House may know, and went to the finance committee, where it died a very slow death.

There are a lot of new members in the House since the last election and there may be Canadians looking in on this debate this morning who may not know exactly where this particular bill fits in history, so I want to take a few moments to go back and look at how we got to where we are today.

A major change occurred on January 1, 1996, for about 85,000 Canadian seniors in Ontario, Manitoba, British Columbia, Quebec and New Brunswick, who lived in Canada but happened to work in the United States and upon retirement collected U.S. social security cheques. What happened on January 1, 1996, is that their entire retirement changed. They were given a pretty substantial tax increase that changed the economic presumptions for their retirement years.

Of course, that all started three weeks before January 1, a week before Christmas in 1995. When most kids were writing letters to Santa Claus about all the good things they would like, these seniors received letters from a government agency informing them that in three weeks the way they were taxed was going to change.

We have a Canada-U.S. tax treaty that exists for some very important reasons. The two countries came together and agreed, for example, on how a Canadian resident in the United States, or an American who collects CPP, the Quebec pension plan or old age security, was going to be taxed and treated. We had to define on this side how we were going to treat Canadians who collect U.S. social security pensions or Americans who happened to be resident here as well.

At one time, these seniors were not taxed at all but in 1984 two protocols to the Canada-U.S. tax treaty changed the way they would be taxed. They were taxed in the country of residence, not in the source country, where the benefit came from. The maximum inclusion rate was set at 50%, so half their income would be included for taxable purposes. That was the situation that existed from 1984 to 1996.

Then came the third protocol, in the dreaded Christmas letter that these seniors got. The change was that their taxation would be done in the source country, where the benefit came from. They would have 25.5% of their income withheld at source.

Let us imagine this change. There was literally no time for these seniors to respond. There was no ability to cushion against the shock of such a change. There was no control over the benefit they received because it was withheld at source, so what they would get is all they would get. It was a tremendous and very drastic change that happened over that Christmas season. Starting January 1, suddenly 25.5% of their income was withheld at source and they got a much smaller pension cheque.

At that time, a citizens' group mobilized in the region. Canadians Asking for Social Security Equality mobilized very quickly and in large numbers, because many seniors were affected. In our region, I think the member for Windsor—Tecumseh will recall some of the meetings at the time. They came out in the thousands and forced the government of the day to go back to the table and renegotiate with the United States.

In Canada at the time, the finance minister, the current member for LaSalle—Émard, was looking to balance his budget. In the United States, President Clinton was looking to balance his budget and saw an opportunity to tax the richest of the seniors in the United States. He saw this as his opportunity to do that.

Therefore, we had a fourth protocol negotiated between the two countries. It changed back to residence taxation instead of these seniors being taxed in the nation where the benefit came from. But something interesting happened. After these seniors were promised that this was going to be a revenue neutral change, many of them were expecting that we were going back to the 50% inclusion rate. They had a really nasty surprise. The inclusion rate was set at 85%. It did not go back to the way it way before January 1, 1996, so instead of the wrong being righted, it was compounded.

It would be nice to point out, of course, that the finance minister of the day left a convenient loophole for family ships not to be taxed. That was in the same piece of legislation, the same treaty whereby these poor seniors were getting a whopping 70% tax increase. What a cruel irony that the rule-maker got to make the rules in his favour while thousands of seniors, who do not have any ability to make or change rules but are affected by them, had a tax increase instead.

As for Canadians Asking for Social Security Equality, what an incredible group. They mobilized in four successive elections, in 1997, forcing the government of the day to go back and renegotiate, and in 2000, 2004 and 2006. I say this with some bittersweet feelings. This group is very successful at mobilizing and at keeping this issue before candidates, prospective members of Parliament and prospective governments. However, I was talking not long ago with some of the folks doing the phone calls. With every election and every phone call, the cold hard reality is that yet another member is deceased, and another and another, or the latest ailment or disease is afflicting the few who survive.

Of course, this news kept coming, election after election. I can tell members that CASSE does not want to mobilize for another election. Quite frankly, its members should not have to. In my opinion, it is time to pass this private member's bill and get on with this measure. Or also, I would be pleased if this wound up being a line item in a budget, something for which I am working hard.

These seniors have been waiting a long time. They are looking for justice. Who are these seniors? Let us go back and look at what that generation achieved. Certainly they worked in the United States, but they lived in our communities. They built our communities across Canada. Talk about great foreign investment: they went to the United States, brought back their wealth and invested it in our communities here.

Let us go back and imagine these seniors in their prime. World War II has ended. They set about growing families and building homes and barns, hospitals and fire halls in their communities, delivering the services that were necessary and starting the businesses that employed others. They built community centres and churches, improving the quality of life in their communities. They went to work in the auto factories, building the cars their generation would drive. They worked the fields, harvesting and sending product to market.

Former NBC news anchor Tom Brokaw called these seniors “the greatest generation”. I do not call them the greatest generation; I call them the selfless generation, a good example to my generation. They were the dreamers. They had a good vision for this country. They were the builders. With their bare hands and their hard work they built this country and made it what it is today.

Those people were selfless because they thought about the generations to come. They did not think about what they wanted or what they could get from everyone else. They thought about what they could save and invest in their children and grandchildren. That is the kind of thinking of this generation. They planned for their own self-sufficiency. They did not ask anybody else to do anything for them. They saved their pennies. They worked hard. They did not just suddenly get to retirement and wonder who would take care of them. They were thinking long before that. This is why this was such a cruel thing. They knew that if they lived to a certain age they would need to save enough to be fine when they retired.

They were the givers. They gave to others and to charities. They started community groups that worked hard to meet the needs of people in their community. They were fundraisers. They went out and raised money for all kinds of noble purposes in their community. They were the generation that never asked for anything in return.

What happened to these seniors? Many have been forced from their modest accommodations into nursing homes or forced to move in with siblings who were also senior citizens. However, this move was symbolic of something, I think, much deeper. They have been forced from independence to a situation of dependence, which is what this tax increase did.

Seniors have been forced into making choices that they never thought would happen. They do not know whether to pay for their prescription drugs this month or to pay the gas bill to keep the gas on in their homes. They do not know whether they should buy groceries or pay the electric bill? The wonder if they can buy a gift for their grandchild's birthday or if they can lend money to their son or daughter who is in a bit of financial difficulty. This is the generation that saved and planned so they could give to other generations but they cannot make those choices any more. That is what this tax increase did to them.

They are bitter. They were misled. They were told that things would go back to the way they were before. It never happened. Their esteem and their future plans for retirement have been shattered through no fault of their own.

There are several roots to bitterness but one of them is the feeling that we are owed something.

While tax relief for any senior is good thing, and I support those measures, for these seniors they are owed something. They are owed a change, a change that will help them heal and help them get to back on top of their lives.

I am calling on members of this House to come together and to find the will to act now so that these seniors get back on top. We owe it to them.

[Jeff Watson, Conservative, Essex, ON]

moved for leave to introduce Bill C-305, An Act to amend the Income Tax Act (exemption from taxation of 50% of United States social security payments to Canadian residents).

Mr. Speaker, this bill is designed to restore tax fairness to Canadians, especially Canadian seniors who worked in the U.S. but lived and invested in our communities across Canada. Ten years ago they received a 70% tax hike. This bill seeks to reverse that. This bill received broad support from members in the last Parliament and was sent to committee. I look forward to their support again to ensure our seniors receive their deserved tax fairness.

(Motions deemed adopted, bill read the first time and printed)