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Tax pro familiar with Canadian and American taxes. I have an…

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This question is for a tax pro familiar with Canadian and American taxes. I have an American living in Canada with Self Employment income from Canada, K-1 income from America, and Canadian Pension income, their equivalent of Social Security. My client has been told his Canadian pernsion income is not taxable in America. I would like a clear cut explanation on how Canadian pension income would be taxed in this situation. I have everything worked out on tax return except the pension income. Is his pension income taxed in Canada? Is his Canadian pension income taxed in America? I believe the answer to the last question is "Yes. As part of his world wide income his Canadian Pension income IS taxed, but tax is offset by foreign tax credit." My client has been told there is a provision in the US Canada Tax Treaty that makes his Canadian pension income not taxable in America. Is there any such provision? If you do not know the answer to this particular question, please do not select it to answer.
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Answered in 14 minutes by:
10/11/2017
Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,420
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Hi, Dave.

Article XVIII of the U.S./Canada Tax Treaty says:

ARTICLE XVIII Pensions and Annuities

1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any pension included in income for the purposes of taxation in that other State shall not exceed the amount that would be included in the first-mentioned State if the recipient were a resident thereof.

2. However: (a) Pensions may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 per cent of the gross amount of such payment; and (b) Annuities may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of an annuity payment, the tax so charged shall not exceed 15 per cent of the portion of such payment that is liable to tax in the first-mentioned State.

3. For the purposes of this Convention, the term "pensions" includes any payment under a superannuation, pension or retirement plan, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan, but does not include payments under an income-averaging annuity contract or any benefit referred to in paragraph 5.

4. For the purposes of the Convention, the term "annuities" means a stated sum paid periodically at stated times during life or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered), but does not include a payment that is not a periodic payment or any annuity the cost of which was deductible for the purposes of taxation in the Contracting State in which it was acquired.

5. Benefits under the social security legislation in a Contracting State paid to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

See paragraph 5: If the pension is paid under the Social Security legislation in Canada, the pension is only taxable in Canada.

Barb

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Customer reply replied 9 months ago
OK.This is actually different than one the other pro you referred to me originally said.Looking over provisons, 1 is n/a as pension arises in Cadada. 2 is also n/a. 3. says if it is social security are inocme averaging annuity contract, it is ot a penion. 4) is totally confusing and I do not think it applies. 5) is tricky. So I guess I do not count the canadian social security income as income on the 1040 at all, even though the foreign tax expert you referred me to told me to put it under pension or other income, no US tax is incurred on it, and the remaining US tax is muliplied by ration of Canadian to worldwike income x US tax owed. And the Canadian income includes the Canadian Soc Security income. Looks like I made a mistake taking the other pro's advice. Maybe I misunderstood what he told me, but I do not think so. He never said to exclude canadian pension income from WW income for US tax purposes.

You do REPORT the Canadian Social Security income (remember as a U.S. citizen you must report your worldwide income), but it is NOT taxable.

As an example, a U.S. citizen who lives in the U.S. is still required to REPORT his/her Social Security income whether it is taxable or not.

Make sense?

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Customer reply replied 9 months ago
ok. Where do they report it so it does not get taxed?

Line 20a of the 1040 is where it should appear. You have to enter it on the return in the same location as non-taxable U.S. Social Security.

I don't remember what tax software you use, but there should be a workaround for it not to be taxable.

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Just following up with you to see if you have any other questions. If so, please let me know so I can continue to assist you.

Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,420
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Barbara and 87 other Tax Specialists are ready to help you
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Thank you for the positive rating, Dave. I appreciate it!

Please let me know if I can assist you in the future.

Enjoy the rest of your weekend!

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