# Reporting CPP on USA taxes



## fresnarus

I am a US citizen resident in Canada, and the tax issues are driving me bonkers.

I have a T4-slip from Canada which shows that a CPP contribution was deducted from my Canadian salary. IRS publication 54 _Tax Guide for
U.S. Citizens and Resident Aliens Abroad_ states 
No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. For more information about these agreements, see Publication 54.​which would indicate that I get no deduction or foreign tax credit for my CPP contributions.

However, this doesn't definitively settle the matter, since IRS publications are overruled by tax treaties.

Is there anything in the US-Canada tax treaty which says that I can take a deduction or tax credit for my CPP contribution?


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## Auld Yin

Not if you're tax-resident in Canada.


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## fresnarus

*clarification*

It's not clear from Auld Yin's answer whether he's misread my perhaps poorly-phrased question question. (Do you have any sort of explanation of some paragraph of the treaty?)

The question is whether I can apply the tax treaty to claim any deduction, exclusion, or credit on my USA return. (What do I do on form 1040 or 1116? It's clear how I report the CPP contribution on my Canada form T1.)

To be clear, since I am a US citizen I must file tax in the USA. I also file tax in Canada, since I am a resident of Canada.

It's clear that my RRP (as opposed to my CPP) is excluded from USA tax by XVIII(13) and XVIII(15) of the (consolidated) US-Canada tax treaty.


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## BBCWatcher

Short answer: no. However, participation in CPP (Canadian social security) does mean you are exempt from U.S. Social Security and Medicare payroll tax contributions on that same income, per the U.S.-Canada social security treaty. So there's your treaty benefit. This is neither better nor worse than how you'd fare in the U.S. You do not get a credit or deduction for U.S. Social Security/Medicare contributions, so same thing -- no superior benefit in Canada, but no inferior one either.

Be sure to report gross income on the U.S. side.

On occasion U.S. tax treaties offer some interesting treatment of Social Security benefits when it comes time to collect, but among social security treaty countries the contribution side is very simple: you swap the U.S. program for the foreign program, with the same tax treatment. No better, no worse. (The foreign program may have a different payroll tax rate, of course, but it also will have different benefits.)


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## fresnarus

*possible legal justification*

This point is controversial online: For example, Serbinski claims "Even though all Canadian social security taxes are available as a foreign tax credit to U.S. citizens working Canada (subject to limitation for income excluded under IRC 911)...."

That said, after some amateur study I agree with Auld Yin and BBCWatcher that I may NOT claim any US deduction or credit for CPP contributions taken from my Canadian salary, although I get a tax credit on form 1116 for EI ("employment insurance") and simply exclude RPP contributions on my T4 slip from my income as I report it on 1040.

Here is my justification. (I will be a richer if someone proves me wrong.)

From IRS publication 514, Foreign tax credit for individuals,

"*What Foreign Taxes Qualify for the Credit?*
1. The tax must be imposed on you.
2. You must have paid or accrued the tax.
3. The tax must be the legal and actual foreign tax liability.
4. The tax must be an income tax (or a tax in lieu of an income tax)
...............................................................................
*Income Tax*
Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. A foreign levy is an income tax only if it meets both of the following requirements.
1. It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it.
2. The predominant character of the tax is that of an income tax in the U.S. sense.
..............................................................................
*Pension, unemployment, and disability fund payments. *
A foreign tax imposed on an individual to pay for retirement, old*age, death, survivor, _*unemployment*_, illness, or disability benefits, or for substantially similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual. _*No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement.*_ For more information about these agreements, see Publication 54."​ Publication 54 says the USA has a social security agreement with Canada, the CPP gives no deduction or credit.

The last passage above also shows that the Canadian EI (Employment Insurance) tax DOES generate a US credit on form 1116. (The EI tax is a flat percentage of salary, up to a certain maximum.)

However, to be certain no US credit is given for Canadian CPP taxes, one also needs to check whether the US-Canada tax treaty overrules publication 514. Indeed, as has been pointed out by nelsona on the Serbinski forum (I'm not allowed to post links here yet), the technical explanation to the 1984 protocol to the US-Canada tax treaty states 
"However, the Convention has the effect of covering the Canadian social security tax in certain respects because under Canadian domestic tax law no such tax is due if there is no income subject to tax under the Income Tax Act of Canada"​However, Article XXIV(1) of the US-Canada tax treaty provides for tax credits only "_subject to the laws of the United States._" I see on other article providing a US credit/deduction for the CPP contributions.

So it appears that the treaty provides no FTC for the CPP contributions, either. 

(Please someone tell me I'm overlooking something.)

The question of what to do with RPP contributions listed on my T4 slip is much simpler: It is answered directly by XVIII(13) of the consolidated US-Canada tax treaty.


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## BBCWatcher

For what it's worth, I agree with your interpretation.

For the record, IRS Publication 597 summarizes many of the more important considerations in the U.S.-Canada tax treaty. However, Publication 597 does not discuss this particular topic. Even so, it may be useful for future reference, particularly when you receive CPP benefits.


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## fresnarus

BBCwatcher- 

I'm glad you agree, although I still hope someone will prove me wrong!

I've found publication 597 to be too brief to be useful. I prefer the book "Canada-US tax treaty: A practical interpretation," published by CCH, although what I'd really like is just an book full of examples of correctly-filed US-Canada returns.


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## Bevdeforges

One problem with that approach is that there is no one "correct" approach to filing any particular set of tax forms - whether one lives in the US or elsewhere. The US tax system is rife with choices, options and interpretations, especially when foreign income in involved.

The IRS pretty much leaves it up to the taxpayer to fit their financial situation into the pigeonholes defined by the Tax Code and Regs. Different taxpayers take different positions on the same types of financial instruments and they do or don't fly, depending on how it affects the overall tax return.

On the issue of "social security" or other "social insurance" payments or taxes, though, the IRS has been pretty uniform in insisting that ONLY income taxes may be credited against US income tax obligations. Most European countries seem to allow their taxpayers to exclude most social insurance payments or withholdings from income for tax purposes, but US taxpayers still have to "gross up" their pay for their 1040s.

OTOH, when receiving State benefits outside the US, there are options as to whether to characterize the payments as "public assistance" (which may allow you to omit the benefits altogether) or "insurance proceeds" (under slightly more complicated rules regarding the taxable portion of any payment). Or even as treaty items, such as many state pensions, which may be specifically taxable by one country or the other under the existing treaties.
Cheers,
Bev


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## HillbillyCanuck

According to the 2013 book A Tax Guide for American Citizens in Canada by Richard Pound and Max Reed "Canada Pension Plan income is not taxable. You do not need to report it". The authors strike me as very authoritative. 

Perhaps I don't understand the question but If CPP is not reportable, then there's no deduction needed since it's not included as income.


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## fresnarus

HillbillyCanuck writes

"According to the 2013 book A Tax Guide for American Citizens in Canada by Richard Pound and Max Reed "Canada Pension Plan income is not taxable. You do not need to report it"​
The question of this thread is NOT about _CPP income_. The question is about _employment income_ that is taken from my paycheck to pay into the CPP, and to what extent this Canadian confiscation is a "tax" which generates a compensating tax credit, exclusion, or deduction on USA taxes. (Note that as a US citizen resident in Canada I must report my worldwide income on tax returns to both countries. I then claim tax credits, exclusions, and deductions to escape double-taxation.)

It's not even clear what is meant by this out-of-context snippet from that book, since "taxable" is ambiguous in international situations without specifying which country(ies) is/are doing the taxing.


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## HillbillyCanuck

My bad. I didn't read your question carefully enough.

The same book also has a sub-section with the title "Taxes You Cannot Deduct". Among the items listed is "Contributions to Canada Employment Insurance or Canada Pension Plan".


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## fresnarus

HillbillyCanuck said:


> My bad. I didn't read your question carefully enough.
> 
> The same book also has a sub-section with the title "Taxes You Cannot Deduct". Among the items listed is "Contributions to Canada Employment Insurance or Canada Pension Plan".


Did they give any justification for this opinion, or did they just state an opinion to be taken on authority? (Note that besides deductions there are also exclusions and tax credits.) 

This is not a comment on your particular book, which I don't have in front of me, but I must say that I've seen so much BS written by international accountants and tax lawyers that I don't even pay attention to them anymore. If they cite references to the tax treaty, the tax code, treasury technical explanations, private letter rulings, court cases, ect. then sure I'm interested, and I check the citations for myself. Those are the definitive sources, not simply the opinion of someone who writes a book or blog implicitly advertising their accounting or law firm. My favorite book on US-Canada tax is _Canada-US tax treaty: A practical interpretation_, published by CCH.

I made a list of some startling examples of accountants being spectacularly and publicly wrong in section 2.3 of my notes on PFICs. Note that there is clear evidence of accounting BS or incompetence regardless of whether or not you believe that you can claim US losses from PFICs with no 8621 elections-- There are accountants and tax lawyers who are emphatically and publicly on either side of the issue! Furthermore, the majority disagree with commercial software specifically made to deal with PFIC taxation.

I'm sorry for the rant, but it's a bit of a catch-22 dealing with tax professionals/lawyers. Many of their clients aren't searching for a valid opinion on the tax code/treaties: They simply want plausible deniability ("my accountant did my taxes"), rather than valid legal advise. The accountants understand this, attracting dishonest people into the profession. (This is doubly-true in international situations, since it's hard to go after a Canadian accountant for messing up a US tax return.) But dishonest people can be negligent with their clients' money, especially if the clients aren't able to check their work for themselves.

There is an international accounting specialist that I hired to answer some questions for me. (I won't name any names, but his hourly rate is scary.) About half of the answers I disagreed with, and I confronted him with contradictory evidence from the tax treaty, tax code, ect. In each case he reversed himself, but he didn't refund any money (or pay me for telling him the correct answer). Was this lack of refund simply because he viewed his service as providing legal cover? One of his opinions (that I needn't amend my US tax credit for taxes which Canada subsequently readjusted for the better) was transparently illegal, although his reaction to my protests was that he "wouldn't encourage me to do anything I was uncomfortable with". If the IRS went after me for fraud would I have any recourse against this accountant in Canada? I should mention that this guy also wrote a book, which was the reason I was willing to hand over my money for his services.


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## HillbillyCanuck

fresnarus said:


> Did they give any justification for this opinion, or did they just state an opinion to be taken on authority? (Note that besides deductions there are also exclusions and tax credits.)


In this case, no reference to the source for their opinion was provided. There have been a few situations when I, too, would have appreciated a references to the sources of their opinions. That being said, I've found the book very useful. My only major complaint is that a 300+ page book needs more than a four and a half page index.



> This is not a comment on your particular book, which I don't have in front of me, but I must say that I've seen so much BS written by international accountants and tax lawyers that I don't even pay attention to them anymore. If they cite references to the tax treaty, the tax code, treasury technical explanations, private letter rulings, court cases, ect. then sure I'm interested, and I check the citations for myself. Those are the definitive sources, not simply the opinion of someone who writes a book or blog implicitly advertising their accounting or law firm. My favorite book on US-Canada tax is _Canada-US tax treaty: A practical interpretation_, published by CCH.


The book is not intended for professional tax preparers and probably wouldn't be terribly useful for someone as highly knowledgeable as you appear to be. The book's target audience is the average "U.S. person" living in Canada who is trying to prepare an American tax return by herself. The book certainly doesn't seem to be intended to drum up business for either author's firm and the only email or web address provided is that of the book's publisher.



> I made a list of some startling examples of accountants being spectacularly and publicly wrong in section 2.3 of my notes on PFICs. Note that there is clear evidence of accounting BS or incompetence regardless of whether or not you believe that you can claim US losses from PFICs with no 8621 elections-- There are accountants and tax lawyers who are emphatically and publicly on either side of the issue! Furthermore, the majority disagree with commercial software specifically made to deal with PFIC taxation.
> 
> I'm sorry for the rant, but it's a bit of a catch-22 dealing with tax professionals/lawyers. Many of their clients aren't searching for a valid opinion on the tax code/treaties: They simply want plausible deniability ("my accountant did my taxes"), rather than valid legal advise. The accountants understand this, attracting dishonest people into the profession. (This is doubly-true in international situations, since it's hard to go after a Canadian accountant for messing up a US tax return.) But dishonest people can be negligent with their clients' money, especially if the clients aren't able to check their work for themselves.
> 
> There is an international accounting specialist that I hired to answer some questions for me. (I won't name any names, but his hourly rate is scary.) About half of the answers I disagreed with, and I confronted him with contradictory evidence from the tax treaty, tax code, ect. In each case he reversed himself, but he didn't refund any money (or pay me for telling him the correct answer). Was this lack of refund simply because he viewed his service as providing legal cover? One of his opinions (that I needn't amend my US tax credit for taxes which Canada subsequently readjusted for the better) was transparently illegal, although his reaction to my protests was that he "wouldn't encourage me to do anything I was uncomfortable with". If the IRS went after me for fraud would I have any recourse against this accountant in Canada? I should mention that this guy also wrote a book, which was the reason I was willing to hand over my money for his services.


I agree with your comments regarding members of the compliance industry. Following the start of the FBAR/FATCA publicity drive, I've employed two different firms to prepare my U.S. tax return. Both of them made a botch of it. If I'm going to have to go over a professionally prepared tax return with a fine-toothed comb, I might as well do it myself.

I've done the last two American tax returns myself and in the process have had to learn far more about the U.S. tax law than I ever wanted to know (those with an appetite for masochism might enjoy figuring out how to handle Canadian capital gains in the foreign tax credit). Since my tax returns differ little from year to year, I think I've reached a place where (with the help of software) tax return preparation becomes almost a rote exercise and my predominant reaction to the process is annoyance rather than extreme anxiety.


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## maz57

HillbillyCanuck said:


> I agree with your comments regarding members of the compliance industry. Following the start of the FBAR/FATCA publicity drive, I've employed two different firms to prepare my U.S. tax return. Both of them made a botch of it. If I'm going to have to go over a professionally prepared tax return with a fine-toothed comb, I might as well do it myself.


That, in a nutshell, is how I wound up learning a bit about the US tax code. You ask 5 of these so-called experts a question and you get 5 different answers. I figured why spend big bucks to get it wrong when I can get it wrong myself for free! Besides if you phone the IRS with a question about expat taxes, they don't know the answer either. So how would they even know if you did something wrong?

My theory was that as long as you report all the income, the IRS might "reach out" for screwing up the forms, but you probably wouldn't be in very big trouble. I never heard a peep from them. The IRS is probably happy if they get anything at all; most expats not only don't file, they don't even know they are supposed to file.


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