Social Security Taxes – Assignment Planning for Success
By Diana Matwichuk, CompassGUIDES HelpDesk Coordinator
Most Canadian employees pay their Canada Pension Plan (“CPP”) contributions without much thought since it is automatically deducted from their paycheque. Canadian employers also duly match CPP contributions - social security in Canada is a given.
As a result, social security tax is an oft-overlooked aspect of international assignment planning. Social security coverage in other parts of the world is expensive, yet maintaining ongoing CPP coverage can offer significant savings in assignment costs for both the assignee and the multi-national employer.
Designed to protect against loss of employment income in the case of retirement, disability or death, the Canada Pension Plan is funded by mandatory contributions based on employment earnings. Canadian companies are required to match their employees’ contributions.
If an employee is working abroad, or normally works at the Canadian office, or is still a resident of Canada and is paid from the Canadian office, then the company must also match that employee’s CPP contributions.
Applications for Non-resident Coverage
Canadian employers can also apply to cover all non-resident assignees in a particular country. Such an application must include all eligible employees in that country, and cannot be filed on an employee by employee basis. This application would normally be part of a multi-national employer’s Assignment Tax Program.
Effect on the Assignee
Should an assignee choose to discontinue CPP contributions, ultimate retirement benefits may be reduced. The calculation for the retirement pension portion of CPP benefits is based on average monthly pensionable earnings, and a period of non-contribution during the timeframe of an international assignment would decrease this average monthly amount.
Fortunately, allowances are made for periods of lower or no earnings by eliminating up to 15% of total number of months from the benefits calculation.
Disability benefits from CPP, however, are based on contributions made by the employee in 2 of the past 3 years, or 5 of the past 10 years. Depending on the length of an assignment, failure to contribute to CPP while working internationally can adversely affect the disability portion of CPP benefits eligibility.
Canada has established bilateral social security agreements, called totalization agreements, with a number of countries. These allow assignees to avoid being subject to the social security taxes of two countries on the same income. Further, the benefits of the two social security systems can be coordinated to allow for benefits coverage under one system while contributing under the other system.
Totalization agreements usually specify that an employee will be subject to the social security coverage in the country in which he is working, and exempt from coverage in his home country.
Detached Worker Rule
An exception to the usual totalization provisions is the detached worker rule, in which an assignee who has been temporarily relocated to another country can continue to be covered under the home country system and be exempt from host country social security coverage.
A detached worker can be defined as an employee of a Canadian company, who normally works in Canada but has been temporarily assigned internationally.
Benefits to the Canadian Assignee
Given the extent of Canada’s comparatively attractive social security system, it is often advantageous to the employee to continue CPP coverage while working internationally. CPP benefits are in general quite generous, and the cost to the employee is lower than in other countries.
Benefits to the Canadian Employer
If an employer is to match the social security contributions of an employee assigned to a European country, for example, it would be preferable to direct this contribution toward the CPP. Opting for the lower CPP contributions can help to contain overall assignment costs.
Incorporating Totalization into Assignment Planning
In general, successful assignment planning will include an analysis of the cost savings available to both the assignee and the company through totalization. Assignment managers should evaluate whether it is advantageous to opt for social security coverage in the host country or Canada. This determination should take place well in advance of the assignment in order to allow time for certificates of coverage or necessary reporting changes.
For example, assignees whose skills are in demand internationally are often transferred from one country to another without a Canadian break in between. It is possible, however, for Canadian employers to ensure that these assignees are eligible for CPP coverage as detached workers by employing them by a Canadian subsidiary for a brief period, in order to comply.
Example: US Coverage
Per the US – Canada social security agreement, an assignee to the US can be covered by CPP for up to 60 months, with a possible extension of that period. During that time, the assignee would be exempt from US social security tax on the same work.
US social security tax rates are considerably higher than those in Canada, and it is cost-effective to both the employer and the assignee to take advantage of totalization in this case.
For a 5-year assignment to the US, with a $80,000 US salary and exchange rate of 1.2372 assumed:
Salary converted to Cdn$ $98,976 Cdn
CPP contribution $ 1,861 Cdn (2005 rates)
Converted to US$ $ 1,504 US
US Social Security and Medicare $ 6,120 US
Annual savings to assignee $ 4,616 US
Savings over 5-year assignment $23,080 US
Converted to Cdn$ $28,555 Cdn
Since the employer would have to match these social security contributions, opting for CPP would result in a $28,555 Cdn savings to the company over the course of the 5-year assignment.
Elsewhere in the world, such as in certain European countries, where social security tax rates are even higher than the US, the savings to both the assignee and the employer can be substantially more than the previous example illustrates.
Including a review of social security contributions in international assignment planning can significantly reduce assignment costs for both the assignee and the employer. Starting early will allow for the lead time required to apply for certificates of coverage or arrange for brief periods of Canadian employment, as required. Doing so will optimize these savings.
At CompassTAX™, we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.
CompassTAX™ also offers clients with international assignees pre-departure and re-entry tax planning with a view to minimizing tax and providing experienced tax representation with the Canada Revenue Agency (CRA). CompassTAX™ specializes in all areas of cross-border taxation for consultants coming to Canada temporarily, Canadians moving back to Canada, and individuals living outside Canada with Canadian business ties.
The author wishes to thank Peter J. Simpson, CA for his contribution to this article .