2021-0881161E5 NY State Social Security Taxes and FTC

Principal Issues: Whether New York State Disability Insurance and New York State Paid Family Leave premiums qualify for a foreign tax credit under section 126 of the Act.

Position: No.

Reasons: Social security taxes in general do not qualify for FTCs unless specifically provided for in a treaty. The Canada-US Treaty provision allowing FTCs for US social security taxes only applies to US federal social security taxes.

Author: Spiers, Alison
Section: s. 126, Article II and XXIV of Canada-US Income Tax Convention

XXXXXXXXXX                                                             A. Spiers
                                                                                     alison.spiers@cra-arc.gc.ca
                                                                                     2021-088116

February 9, 2022

Dear XXXXXXXXXX,

RE: NY State Social Security Taxes and Canadian FTCs

We are writing in reply to your letter dated February 12, 2021 in which you inquired into a taxpayer’s eligibility to claim foreign tax credits (“FTCs”) in Canada in relation to New York State Disability Fund (“NYSDF”) Tax and New York State Paid Family Leave (“NYSPFL”) Tax paid by an individual.

Facts:

Canadian resident individuals earn employment income in the State of New York and as a result have NYSDF and NYSPFL taxes automatically deducted from their salary.

Our Comments:

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70·6R11, Advance Income Tax Rulings and Technical Interpretations.

In Income Tax Technical News (“ITTN”) No. 30, the CRA has taken the position that social security taxes, in general, would not qualify for FTCs as they do not meet the common law definition of a tax which requires that the charge be imposed to raise revenues for general fiscal purposes. The only exception to this is if the social security taxes in question are specifically identified in a treaty Canada has with the country where the tax is levied. The Canada-US Income Tax Convention ( “Treaty”) provides that “United States social security taxes” qualify for an FTC. The phrase “United States social security taxes” is not defined in the Treaty, but the Technical Explanation for the First and Second Protocol of the Treaty stated that the phrase was meant to include only specific sections of the US Code known as Federal Insurance Contributions Act (“FICA”) taxes. Since NYSDI and NYSPFL taxes are not under FICA, but rather NY State legislation, they would not qualify for an FTC under the Treaty. As a result, since the premiums do not qualify as non-business income tax under section 126 of the Income Tax Act, nor do they qualify for a FTC under the Treaty, no FTC is available in Canada in relation to these taxes.

We hope this information is of assistance to you.

Yours truly,

Charles Taylor
Acting Section Manager for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency

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