2022-0940131I7 U.S. Dependency and Indemnity Compensation

Principal Issues: (1) Whether Dependency and Indemnity Compensation (DIC) benefits received by a taxpayer resident in Canada from the United States Department of Veterans Affairs are taxable under the Act. (2) Whether such DIC benefits are exempt from taxation in Canada under the Canada-U.S.

Position: (1) Yes. (2) No.

Reasons: (1) The DIC benefits are annuity payments and are included in income under paragraph 56(1)(d). (2) Paragraph 1 of Article XXII of the Canada-U.S. Tax Convention gives Canada the right to tax the DIC benefits regardless of their tax treatment in the U.S.

Author: Pietrow, Victor
Section: 56(1)(d); Canada-U.S. Tax Convention

XXXXXXXXXX                                                                                    2022-094013

January 18, 2023

Dear XXXXXXXXXX:

Re: U.S. Dependency and Indemnity Compensation

We are writing in reply to your email of May 30, 2022 in connection with the treatment under the Income Tax Act (the “Act”) of payments of Dependency and Indemnity Compensation (DIC) benefits received by a Canadian resident taxpayer from the United States Department of Veterans Affairs. In particular, you have asked for our views as to whether payments of DIC benefits received by a Canadian resident taxpayer are taxable under the Act and whether such payments are exempt from taxation in Canada under the Canada-U.S. Tax Convention (the “Treaty”).

We understand that, in determining “income” for the purpose of calculating Guaranteed Income Supplement entitlements, the OAS program relies, as a starting point, on net income computed in accordance with the Act.

Our comments

We have examined the information provided with your submission as well as some of the material that is available on the Internet pertaining to DIC benefits.

We understand that DIC benefits are periodic payments made to eligible survivors of members of the United States of America (“U.S.”) military who died in the line of duty or eligible survivors of veterans whose death resulted from a service-related injury or disease. We also understand that DIC benefits are non-taxable payments in the U.S.

In our view, DIC benefits paid to a person resident in Canada are annuities which fall within the provisions of paragraph 56(1)(d) of the Act and should be reported as annuity income by the individual.

Furthermore, we are of the view that there are no provisions of the Treaty that apply to exempt DIC benefits received by a person resident in Canada from income tax in Canada. It is our view that DIC benefits are not a pension for purposes of the Treaty and accordingly, the exemption from tax in Canada under Paragraph 1 of Article XVIII of the Treaty for pension amounts that are not taxable in the U.S. if the recipient were a resident of the U.S. does not apply.

Finally, it is our view that Canada has the right to tax the DIC benefits received by a person resident in Canada pursuant to Paragraph 1 of Article XXII of the Treaty and this right is not affected by how the DIC benefits are taxed in the U.S.

We trust that these comments will be of assistance.

Yours truly,

Irina Schnitzer

A/Section Manager

for Division Director

Financial Industries and Trusts Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

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