Moving to another country presents significant tax planning opportunities, especially if you are moving from Canada to the US. A commonly overlooked tax strategy for incorporated professionals and other intercompany transferees is to avoid US Social Security and Medicare by continuing their coverage under Canada Pension Plan. The tax savings can reach more than US$10,000 annually and more for up to 5 years for qualifying persons.
Many taxpayers confuse Canada Pension Plan and US Social Security as investment strategies. Both of these vehicles have very poor investment returns but are required for employees and self-employed individuals in Canada and the US respectively. The future returns from US Social Security are roughly triple those of Canada Pension Plan, but the cost is approximately five times higher. The only advantage of Canada Pension Plan is that it costs significantly less than its US alternative.
Qualifying Canadians transferring to the US may continue their coverage under Canada Pension Plan and avoid US Social Security and Medicare tax under the Canada-US Social Security Agreement, often referred to as the Totalization Agreement.
Totalization Agreement Advantages
The Totalization Agreement can result in huge savings as the cost of Social Security and Medicare is substantially more than Canada Pension Plan. An intercompany transferee earning US$100,000 annually would save approximately US$6,000 annually and US$30,000 over five years. The employer earns the same benefit. An incorporated individual earning US$100,000 would have double the savings to approximately US$60,000. An incorporated professional earning US$1 million annually would have annual savings of approximately US$48,000 annually or US$240,000 over five years!
To qualify for an exemption from US Social Security and Medicare taxes in the US and continue on Canada Pension Plan for up to five years, the individual must have a Canadian employer that transfers the employee to the US, including a professional corporation. Self-employment income is not eligible. The employee cannot have an employment contract exceeding five years. Whether this tax strategy is appropriate will depend on each individual’s personal facts and circumstances.
Obtaining Canada Pension Plan Coverage
To establish an exemption from US Social Security and Medicare taxes, the Canadian employer must file Canada Revenue Agency Form CPT56 to request a Certificate of Coverage under the Canada Pension Plan. The approved certificate should be provided to the US employer. The former employer in Canada must pay all Canada Pension Plan contributions and submit CRA Form T4 reporting the transferred employee’s pensionable earnings based on their worldwide employment income even though the employee’s taxable wages on the form may be zero. Conversely, the individual’s US employer will report the wages paid but show zero Social Security and Medicare wages.
After Five Years
With limited exceptions, the Canada Pension Plan coverage under the Totalization Agreement only lasts 5 years. After 5 years the employee will be covered under US Social Security and Medicare tax. The employee will be eligible for Social Security benefits even where he or she is employed in the US for less than the required 40 quarters provided he or she is employed in the US for a minimum of 6 quarters and was employed in Canada and the US for 40 quarters or more. The US Social Security benefit payable will be based on the contributions to it by the employee and his employer.
Medicare coverage is only available to individuals with 40 quarters of coverage in the US with limited exceptions
Totalization Agreement Questions?
If you are moving to the US to work and you have questions about your eligibility for Canada Pension Plan coverage, please contact our offices.