Mr. Speaker, I welcome the opportunity to speak to the bill put forward by the hon. member for Essex. The bill would exempt from taxation 50% of the U.S. social security benefits received by taxpayers in Canada. Currently, the exemption is 15%.
This government does not support the bill. I recommend that hon. members of the House not support this bill for a very simple reason: Canadian seniors receiving the Canada pension plan, the Quebec pension plan or old age security benefits are subject to tax on 100% of their income under our tax system, just as employees are generally subject to a tax of 100% of their employment income.
Of course if that senior citizen is a low income taxpayer because of our progressive tax system, he or she, depending on the circumstances, may pay little or no tax on that income.
As a basic rule, however, a senior citizen is subject to tax on 100% of income because income is income, whether it is employment income, investment income or pension income, and it is a basic premise of our tax system that taxpayers having the same income should pay the same tax.
As I mentioned, a senior living in Canada who is receiving U.S. social security benefits is taxed at only 85% of his or her income. I invite members to consider carefully that statement and what it means. Two senior citizens, one receiving CPP and the other receiving U.S. social security, each with the same amount of income, are taxed differently. The senior citizen receiving CPP would, all other things being equal, pay more tax than the senior citizen receiving U.S. social security benefits. The tax system, as it stands, grants preferential treatment to recipients of U.S. social security benefits. I will discuss in a moment why the disparate treatment exists.
First, I want to state that this government will not support a bill that seeks to widen this disparity, a bill that would extend the existing exemption of 15% to 50%.
In the United States, the maximum inclusion rate for social security benefits is 85%. This may serve as some justification for granting the current 15% exemption to Canadian taxpayers in receipt of those U.S. benefits but I am not persuaded as a matter of tax policy.
As a general rule, and it is a sensible rule, U.S. law does not apply to Canadians living in Canada.
New Zealand does not tax capital gains, which is its choice, but that does not mean a Canadian taxpayer selling property situated in New Zealand should therefore not pay tax on any gains.
Canadians are taxed according to Canadian rules and a fundamental aspect of our rules is that similarly situated taxpayers should be taxed similarly, regardless of where their income comes from.
We also have tax treaties with a number of countries, including the United States. These treaties are exceptionally important for they allow Canadians to engage in international trade and commerce without worrying that competing jurisdictions would both tax the same revenue. Without these treaties, a good deal of commerce simply would not take place.
In negotiating these treaties, there is always a quid pro quo. The rule in the current Canada-U.S. treaty that grants a 15% exemption to Canadian recipients of U.S. social security was the result of a negotiated settlement with the United States. Previously, our arrangement had been that the country where the payment arose would have exclusive taxing jurisdiction in respect of these benefits.
As a result, these payments were subject to a final 25.5% withholding tax imposed by the United States. For low income Canadians, this high withholding tax constituted a considerable hardship, since if the benefits had been taxed by Canada these taxpayers would have paid little or no tax.
In negotiating the treaty we sought and obtained residence based taxation in order to help these low income Canadians. In exchange, we agreed to a 15% exemption. This was a negotiated settlement. We got what we wanted: residence based taxation. This allows for low income seniors who are receiving U.S. social security benefits to access our progressive rates and pay little or no tax instead of being subject to a punitive 25.5% withholding tax imposed by the United States.
The United States in exchange received a concession on our part, a 15% exemption so that the maximum inclusion rate under our law would be the same as the maximum inclusion rate under their law. In parallel, recipients of Canadian social security benefits residing in the United States are taxed there according to the U.S. rules and so would also benefit from a maximum inclusion rate of 85%.
The bill proposed by the Conservative member would extend the exemption of 15%, arrived at through negotiation, to 50%. What would then be the answer to the retirees receiving Canada pension plan, Quebec pension plan or old age security benefits who ask why they are paying twice as much tax as the person receiving U.S. social security benefits?
In conclusion, the bill should not receive the support of the House.