This was a final payment of tax. Canadian recipients of U.S. social security benefits, regardless of their level of income, could not elect to be taxed in the United States on a net basis at graduated rates. An amount equal to 85 percent of the benefits that are received will be subject to Canadian tax on a net basis as if the benefits were paid under the Canadian Pension Plan. The new rules must be applied to benefits received during 1998 and future years. For 1996 and 1997, Revenue Canada will determine whether it is more beneficial for taxpayers to be taxed in Canada under the new rules or to remain taxable in the United States under the old rules.
More information is provided below.
The United States and Canada have agreed that taxpayers' 1996 and 1997 benefits will not be subject to an increased rate of tax solely as a result of the 1997 Protocol. Therefore, Canadian recipients of U.S. social security benefits during 1996 or 1997 should not have to pay any additional tax unless there is some other factor that alters their tax liability. Canadian residents who received U.S. social security benefits during 1996 or 1997 on which U.S. tax was paid may be entitled to a refund. Revenue Canada will calculate the amount of Canadian tax, if any, that would have been due for 1996 and 1997 under the new rules. If this amount is less than the amount of U.S. tax paid, the taxpayer generally will be entitled to a refund of the excess amount.