Canada-United States Social Security Agreement
An often overlooked agreement between the two countries can result in significant savings for Canadians moving to the United States. The Canada-United States Social Security Agreement (“Agreement”) provides direction to individuals on which country levies social security taxes, allows for continuation of benefits and coverage while temporarily working away and prevents both countries from levying social security taxes on the same income.
A Canadian resident who is temporarily transferred from Canada to the United States continues to pay Canada Pension Plan premiums on their employment income and avoids paying the more expensive US Social Security and Medicare (“FICA”) taxes. In general terms the employee can be covered under the Agreement for up to five years with further, albeit limited, extensions available.
To qualify, an individual needs to be transferred by their current employer to their US branch or an affiliate of that entity. The individual can work for any size entity including one they control as an employee-owner. Under certain circumstances, self-employed individuals can also qualify for on-going Canadian social security coverage.
A temporary transfer includes individuals working in the United States on various visa categories and permanent resident status (green card) and also includes U.S. citizens. Transfers do not need certainty that the individual must return to their home country to be considered temporary under the Agreement.
Application for coverage under the Agreement for a Canadian moving to the United States is made by filing Canada Revenue Agency (“CRA”) Form CPT-56 with the CRA. CRA may request proof the individual was paid as an employee by the Canadian entity making the transfer before the employee moved to the U.S. Once CRA grants approval, the certificate of coverage can be forwarded to the U.S. employer to retain in their payroll files should the US Internal Revenue Service question the lack of FICA withholding reported.
While it is ideal to apply for coverage under the Agreement before work is started in the U.S., retroactive applications for coverage by CRA can be obtained. Refund requests of overpaid US FICA taxes can also be made once retroactive coverage from CRA is granted.
An individual qualifying under the Agreement while working in the U.S. who earns $150,000 of employment income would be subject to annual US FICA taxes of $9,200 (all amounts rounded) while the same employment covered by the Agreement would only be subject to Canada Pension Plan premiums of only $2,400. As a result, coverage under the Agreement results in savings of $6,800 each year or $34,000 over five years. As the employer also benefits from the savings on their matching portion of social security taxes, the employer can be just as motivated to obtain this coverage as the employee. Such savings for the employee may be reduced or eliminated where the employee continues to be a resident of Canada for income tax purposes since US FICA taxes can be claimed as a foreign tax credit against Canadian income taxes payable on the US sourced employment income.
With proper planning, an employee’s temporary transfer to the U.S. can be accomplished without both the employee and employer having to bear the much higher US FICA taxes.