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.
