Canadian Retirement Benefits Excluded from Current Monthly Income

A Treaty between Canada and the United States that became effective in 1984 was the basis for a bankruptcy court finding that Canadian Old Age Security (OAS) benefits should be treated the same way as U.S. social security benefits for purposes of application of the Bankruptcy Code. In re McPhee, No.13-36046 (Bankr. E.D. Va. Aug. 26, 2014).

The case came before the court on the trustee’s objection to confirmation of the above-median debtors’ chapter 13 plan based on their failure to include their OAS benefits in their means test calculation. The debtors, who are dual citizens of the U.S. and Canada, were receiving $1,631.49 in Canadian retirement benefits. Inclusion of the income received through the OAS would have increased the percentage paid to unsecured creditors from 21%, as proposed in the plan, to 67%. The trustee argued that section 101(10A)(B) of the Bankruptcy Code permits exclusion of benefits under the Social Security Act, but not comparable benefits under Canada’s laws. While the trustee did not dispute the correctness of excluding Social Security benefits from the means test calculation, he argued that the Canadian benefits should not also be excluded.

The bankruptcy court found that the Agreement with Respect to Social Security, U.S.-Can., (Mar. 11, 1981, 35 U.S.T. 3403, TIAS 10 8 63, 1469 UNTS 249) (the “Treaty”) which provides for the equal treatment of Canadian and U.S. benefits under their respective social insurance programs, was dispositive. The Treaty specifies that the benefits it applies to are the U.S.’s Social Security benefits and the Canadian benefits provided under the OAS and the Canadian Pension Act.

The court found that a Treaty may be treated as domestic law when it is “(i) self-executing or (ii) approved by Congress through implementing legislation. Medellin v. Texas, 552 U.S. 491, 128 S. Ct. 1346 (2008).” It found that the treaty at issue satisfied both requirements. “Article II of the Treaty specifies that the Social Security Act and the Internal Revenue Code are modified by the terms of the Treaty, as are any other laws that relate to Social Security benefits. Treaty, art. II, § 1(a), §§ 3-4. Congress also authorized the Treaty through implementing legislation. It was approved by Congress effective August 1, 1984. 42 U.S.C. § 433(e).” The court found, therefore, that the Treaty is “a supreme law of the land entitled to enforcement with equal dignity with the United States Bankruptcy Code and the Social Security Act.” It was thus incumbent upon the court to read the Treaty and the Bankruptcy Code in harmony. Whitney v. Robertson, 124 U.S. 190, 8 S.Ct. 456 (1888). As there was no indication that Congress sought to abrogate the application of the Treaty in the 2005 amendments to the Bankruptcy Code, the two enactments had to be read in harmony to the extent possible. In conclusion, the court found that Canada’s OAS benefits should be excluded from income to the extent that Social Security Benefits are excluded.

Chad L. Edwards, who argued the case in the Bankruptcy Court, said of the decision; “This case demonstrates the need to look beyond the bankruptcy code for guidance, even on issues that may seem fairly settled. I was told by many bankruptcy trustees that we wouldn’t win because the bankruptcy code was clear on the subject. But the truth is that the bankruptcy code is only a small part of federal law. We, as attorneys, have to look at other federal statutes, cases, and even treaties in some cases to truly understand the law’s full application.”