U.S.-Canada social security benefits.

• Author: Lasch, Eric S.
• Position: Taxation

Notice 98-23 contains guidance on the taxation of cross-border Social Security benefits under the U.S.-Canada Convention With Respect to Taxes on Income and Capital, as amended by 1995 and 1997 protocols (the Treaty). For U.S. residents, starting in 1998, Canadian Social Security benefits (including both Canadian/Quebec Pension Plan benefits and Old Age Security pensions) generally will be taxed only by the U.S. (if at all) and Canadian residents receiving U.S. Social Security benefits generally will be taxed only by Canada.

Prior to the 1995 Protocol, each country had the exclusive right to tax Social Security benefits that the other country paid to its residents. Effective Jan. 1,1996, the 1995 Protocol changed a residence-based system to a source-based system; the country that paid benefits to residents of the other country had the exclusive right to tax the benefits.

The 1997 Protocol returned to a residence-based system, under which Social Security benefits are taxable exclusively in the country in which the recipient resides (i.e., citizenship is immaterial). Under the new rules, Canadian Social...