Expats and pension plans

By Sandra Hamilton
Illustration: Geneviève Côté

Before you pack your bags for that foreign assignment, take a minute to check out your government pension benefits

While some consider a transfer abroad an exciting adventure, others consider it nothing more than a necessary evil. In either case, relocating can be an overwhelming experience. Planning around social security is yet another item a prospective expatriate should take into consideration when moving abroad. When a Canadian resident employee leaves to work abroad, it is often in the best interest of the expatriate to continue paying into the Canadian or Quebec pension plans (CPP/ QPP) rather than into the host country pension plan. Firstly, CPP/QPP premiums are some of the lowest cost pension premiums in the world. Secondly, an expatriate may be required to pay into CPP/QPP while on temporary transfer in order to receive the maximum CPP/QPP retirement benefit upon retirement. Thirdly, most individuals would prefer the simplicity of applying to receive retirement benefits, from one rather than two or more governments.

If a Canadian is transferring to a country with which Canada has a Social Security Totalization Agree-ment, it may be possible to be exempt from contributions to the host country pension plan and continue to pay into CPP/QPP. (Note that Quebec has its own unilateral agreements with many but not all countries.) When an employee is transferring to a country with which Canada does not have an agreement, it may be possible to voluntarily pay into both pension plans — should this be beneficial in terms of pension benefits although it does increase contribution costs.

Canada has agreements with many countries. Generally the agreements allow employees transferred by their employer to work abroad on a temporary basis to opt out of paying into the host country government pension plan if the expatriate continues to pay into the home country government pension plan. For the respective agreement to be effective, annual pre-mium remittances must continue and the home country employer must apply to the home government to obtain a Certificate of Coverage. This certificate is kept on file by the home and host employers to support not paying into the host country's government pension plan. Although not required, it may be in the employee's best interest to obtain and retain a copy of the certificate to support the benefit claim made upon retirement.

Each agreement specifies the "temporary" time period for which the certificate may apply. For countries with which Canada has an agreement, the temporary period is defined as between 24 months to 60 months. However, with many countries a subsequent certificate can be applied that would extend the coverage beyond the designated temporary period for typically up to another two years. Under all agreements, once the intent of the transfer ceases to be temporary, the agreement will no longer apply and payments into the host country social security should commence while payments into the home country social security should cease.

For countries which Canada does not have an agreement with, a certificate may be applied for to allow a Canadian employee working abroad on a temporary basis to continue to pay into Canadian social security (while also possibly paying into the host country social security). Although there are duplicate social security costs under this scenario, keeping an expatriate, on temporary assignment in a foreign country, in home social security is often what the marketplace demands. Paying into CPP while working abroad will ensure that an expatriate's temporary transfer will not impact his or her CPP benefit on retirement. Where an agreement exists between Canada and a foreign country, contributions into both countries' pension plans is not an option.

For some, it may not be possible to con-tinue paying into their home country's social security while working abroad. If the transfer is not temporary, a certificate cannot be obtained.

It may not be in one's best interest to continue paying into home social security. First, using an agreement for a temporary transfer indicates an intention to return to Canada that may be considered a residential tie from a Canadian income tax residency perspective and may therefore pose a risk to Canadian non-residency status. Therefore, for Canadian expatriates for whom residency status is questionable or who wish to establish the strong appearance of foreign tax residency, it may not be worthwhile to utilize an agreement to continue paying into Canadian social security. Second, expatriates toward the end of their careers may know that they have already met the criteria for CPP retirement pension maximum benefits (i.e., maximum contributions made to CPP for 40 years). Therefore such an expatriate may benefit more from contributing into the host country social security if he or she will meet the criteria to collect from that host country's pension plan.

If you are already abroad on temporary transfer you're not out of luck. The Canada Revenue Agency (CRA) and the Ministry of Revenue Quebec (MRQ) accept late-filed certificates where conditions of the agreement are met. If a certificate is retroactively applied for, an employer can collect and submit to the CRA/MRQ up to 12 months of retroactive CPP/QPP contri-butions from employees working abroad.

What are the consequences of an expatriate paying into a foreign government pension plan? If all foreign country criteria are met, you can apply to that government for pension plan benefits when you reach the specified age. Typically the foreign country withholds non-resident with-holding tax so that the receipt of its pension plan benefits will not trigger the need to file a foreign tax return. If you are a Ca-nadian resident at the time of receipt of the pension plan benefits, the pension ben-efits will generally be subject to Canadian tax in the year of receipt. Any foreign non-resident withholding tax may be credited to offset Canadian tax (subject to limitations imposed under the Income Tax Act) on the foreign pension plan benefits received. Ultimately a Canadian resident getting foreign pension benefits will pay a tax rate equal to the higher of Canadian residential or foreign non-resident tax rates on the benefit plan benefits.

Many Canadian expatriates pay into US social security. US social security benefits can be paid to residents of Canada. If a Canadian expatriate who has contrib- uted to US social security does not have 40 quarters of coverage in the US, he or she may be eligible for a combined or totalized social security benefit from the US. As long as the employee has at least six quarters of coverage earned in the US, and the years of work in the US plus the years of work in Canada total at least 40 quarters, the employee will be eligible for a prorated social security benefit from the US based on the actual number of years worked in the US.

In addition, a spouse at retirement, even if he or she never contributed to US social security, can receive a spousal social security benefit equal to one-half the Ca-nadian expat's social security benefit at full retirement age. If a spouse at retirement contributed to US social security in addition to the Canadian expat, the spouse is eligible to collect US social security benefits based on his or her record of contributions plus any incremental amount the spousal social security benefit exceeds his or her social security benefits.

A divorced spouse is also eligible to receive US social security benefits on a Canadian expatriate's record if you were married for at least 10 years, the divorced spouse is unmarried at time of receiving US social security benefits and is not eligible for an equal or higher social security benefit on his or her own social security record, or on someone else's social security record. The amount of US social security benefits your divorced spouse receives has no effect on the amount of benefits you or your current spouse may receive.

If you were born before 1938, full retirement age in the US is considered 65 years. Because of longer life expectancies, the full retirement age in the US is increasing for people born after 1938. You can apply for US social security benefits as early as age 62 but the monthly benefits will be less than if you start receiving benefits at the full retirement age of 65 years.

If the recipient of US social security continues to work while receiving benefits before full retirement age (i.e., 62 to 65 years), the US social security benefits may be reduced during this working period. If an employee receives full social security benefit from the US and receives a full benefit from Canada, under current law the employee would be subject to the US Windfall Elimination Provision offset, which would reduce the US social security benefit to be received.

Individuals who have contributed to CPP/QPP — whether during a temporary work assignment in Canada or prior to a permanent move out of Canada — can apply to collect CPP/QPP benefits if they made at least one contribution. If eligible, they can apply to collect their full pension at age 65 or their reduced equivalent at age 60. The amount of CPP/QPP benefits will be based on the amount of pensionable earnings and the months of contributions. If you are a non-resident of Canada while receiving benefits, Canada will withhold non-resident tax, which may be reduced by some income tax treaties.

Although the receipt of pension benefits may be many years away, investing a little time looking into the matter prior to working abroad can ensure that you will be contributing to and receiving pension benefits from the plan that best suits your situation.