US - Canada Treaty & Social Security Benefits
A treaty between the United States and Canada provides guidance for how Social Security benefits should be handled in regard to Canadian taxes.
Note: In the language of treaties, “State” means the United States or the foreign country that the treaty is with; it does not mean one of the 50 U.S. states or similar subdivisions of the foreign country.
Benefits under the Social Security legislation of a State (including tier 1 railroad retirement benefits, but not including unemployment benefits) paid to a resident of the other State shall be taxable only in the State of residence, subject to the following conditions:
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A benefit under U.S Social Security legislation paid to a resident of Canada is taxable in Canada as though it were a benefit under the Canada Pension Plan, except that 15% of the benefit is exempt from Canadian tax; (Can. Treaty, Art. XVII(5)(a)) and,
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a benefit under Canadian social security legislation paid to a resident of the U.S. is taxable in the U.S. as though it were a benefit under the Social Security Act, except that a type of benefit that is not subject to Canadian tax when paid to residents of Canada is exempt from United States tax. (Can. Treaty, Art. XVII(5)(b)),
Thus, a maximum of 85% of Canadian social security paid to a U.S. resident may be subject to U.S. taxes. However, if Canadian social security law is amended to make benefits means-tested at the source and not subject to tax, the benefits will not be subject to U.S. tax. (Can. Protocol Treas. Tech. Expl. p 4)