How Does Canada's Public Pension Program Compensate Expats Living In The US?
By John McCord, Cardinal Point Wealth Management
Canada's public pension program is an important income source for Canadians and Canadian expats. Notably, it supports a modest level of income for those who are eligible. The two-part program is comprised of Old Age Security (OAS) and the Canadian Pension Plan (CPP). A similar plan to CPP is the Quebec Pension Plan (QPP) for those who live in Quebec. We are often asked to review how Canadian pension benefits are applied to Canadian expats living in the US. A general overview regarding both of these programs is discussed below.
OAS is funded through the general tax revenues of Canada. It is administered from the regional centers under Human Resources and Skills Development Canada (HRSDC). The benefits payable are indexed quarterly as measured by the Consumer Price Index. OAS eligibility depends on age, time spent as a Canadian resident, and on legal status. OAS has multiple programs and it is important to establish the amount of one's maximum benefit. Interestingly, employment history and whether a recipient is retired will not be factored into eligibility decisions.
Canadian expats should note that an approved OAS pension may be paid in the US for an unspecified period of time and is considered taxable income. The prior rule assumes that the Canadian expat has lived in Canada at least twenty years following their 18th birthday. Normally, if this rule is not satisfied, the departing Canadian is only eligible for the month of departure and for six additional months. However there are treaty agreements between Canada and many other countries, including the US, that recognize payments and time credits into other countries public retirement programs. Social Security is the US retirement equivalent of OAS and CPP. Expats should ensure that the HRSDC is aware of their US work history and confirm that all contributory years and amounts have been credited during the application process. Otherwise, any payments following the six-month time frame will be suspended until the expat returns to Canada.
Canadians over 18 years of age pay into CPP and the assessed amount is based on their salaries. In the case of an employee, CPP is collected evenly between an employee and their employer. Self-employed individuals are responsible for all CPP assessments. Benefits are determined by the amount and duration of CPP contributions. Beneficiaries of CPP include retired Canadians and their survivors. Please also note that disabled Canadians who cannot work and their children can receive CPP benefits.
The Canada-US Tax Treaty allows for CPP and OAS benefits to be paid to expats without being subjected to CRA tax rates or foreign withholding taxes. This is a significant benefit to Canadian expats living in the US because lower US tax rates apply. In addition, OAS "clawbacks" do not apply to US residents regardless of one's income. Clawback provisions require Canadian high-income earners, over the age of sixty-five, to repay some of their OAS pension income.
In many cases, Canadian expats residing in the US can receive more after-tax benefits while residing in the US in lieu of Canada. Interestingly, eligible Canadian expats can receive OAS, CPP and US Social Security simultaneously. However, there are windfall provisions that reduce benefits. Importantly, each program has strict qualifying criteria. A cross border financial planning situation merits advice from plan administrators and a cross border advisory team.
There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Please contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.