Canadian Income Tax on VA Compensation, Military Retired Pay and Social Security
Under the Canada-U.S. tax treaty, VA disability compensation is exempt from Canadian tax because the United States does not tax it. Military retired pay is taxable in Canada. U.S. Social Security is taxable only in Canada, with 15% of it exempt, even for a U.S. citizen.
Also called: tax, income tax, CRA, Canada Revenue Agency, tax treaty, Article XVIII, VA disability, military retired pay, Social Security, dual citizen.
The Canada-U.S. income tax convention treats all three payments under Article XVIII, and its definitions settle the question that other treaties leave open. Article XVIII(3)(a) says "pensions" includes "Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan."
VA disability compensation: exempt in Canada. Article XVIII(1) lets the country of residence tax a pension arising in the other country, but "the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State." VA compensation is excluded from U.S. taxable income by 38 U.S.C. 5301, so it is exempt from Canadian tax for a resident of Canada. Article XXIX(3)(a) lists paragraph 1 of Article XVIII among the obligations the saving clause does not touch, so this holds even for a Canadian citizen or a dual citizen living in Canada.
Canada's own Income Tax Act has a narrower exemption, section 81(1)(e), for a pension on account of disability or death "arising out of a war" from a country that was Canada's ally in that war, if that country grants similar relief. The treaty rule is wider: it does not depend on war service.
Military retired pay: taxable in Canada. It is a pension under Article XVIII(3)(a) and is not excluded from U.S. taxable income, so Canada taxes it as the country of residence under Article XVIII(1). Article XVIII(2)(a) lets the United States also tax it, at no more than 15% for a non-citizen; the United States taxes its own citizens in full under the saving clause, and Article XXIV sets how each country gives credit. Get advice on the credits before filing in either country.
U.S. Social Security: taxable only in Canada. Article XVIII(5) makes social security benefits paid to a resident of the other country taxable only in the country of residence, and under XVIII(5)(a) Canada taxes U.S. Social Security as if it were Canada Pension Plan income except that 15% of it is exempt. Paragraph 5 is also spared from the saving clause, so the United States does not tax a Canadian resident's Social Security even if the resident is a U.S. citizen.
Thresholds
Thresholds for Canadian Income Tax on VA Compensation, Military Retired Pay and Social Security
Gate
Rule
No rating requirement
The VA compensation exemption follows from the payment being excluded from U.S. taxable income, which is true at every rating.
Residents of Canada
Article XVIII(1) and (5) apply to a resident of Canada, whatever their citizenship, because the saving clause does not reach them.
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Disclaimer
VetTOC is not affiliated with the U.S. Department of Veterans Affairs or the Department of Defense. Information is for reference only and is not an eligibility determination. Verify with VA, the relevant state or territory, or an accredited VSO.