Cross-Border Employees: Avoiding Double Pension Contributions

Cross-border employers may be aware of employee withholding obligations under the Act, but contributions to CPP are sometimes overlooked. Double contributions may arise because an employee is subject to CPP and also to a pension system of another country in respect of the same employment. This problem may be solved by a social security agreement (SSA) between Canada and the foreign jurisdiction. Canada has an extensive SSA network: 57 agreements are in force, and 5 are in various stages of ratification and negotiation.

Employers must deduct CPP from employee remuneration and make corresponding employer contributions for “pensionable employment” as defined in the Canada Pension Plan act and regulations thereunder. Generally, employment that takes place in Canada should be considered pensionable employment regardless of whether the employee or employer is a resident or non-resident of Canada, unless an exemption applies. (However, employment by non-resident employers with no “establishment” in Canada [a concept similar to “permanent establishment”] is generally exempt unless the employer applies to have the employment subject to CPP.) Pensionable employment may include employment outside Canada if the employee is a resident of Canada and is paid at or from an employer’s establishment in Canada, or if the employee ordinarily reports for work at an establishment in Canada.

In some situations, the same employment may be pensionable employment for the purposes of the CPP and subject to a pension system in another country. This can occur, for example, if a non-resident employer assigns a non-resident employee to work at its office in Canada, or if a resident employee is assigned to work outside Canada. Concurrent contributions to both pension systems will increase costs to both the employee (double deductions from remuneration) and the employer (double contributions), and could result in the employee contributing to a pension system he or she is not eligible to benefit from. SSAs can potentially alleviate these consequences.

Under an SSA, an employee is generally subject only to the pension system of the country in which he or she works. However, the employee may be exempt from that country’s system if the employee is subject to a pension system in his or her home country and is assigned to work for the same employer in the other country for a temporary period (from 24 to 60 months, depending on the specific SSA). For example, if an employee who normally works in the United States and is subject to the US pension system is assigned to work in Canada at the employer’s place of business for a period not expected to exceed 60 months, the Canada-US SSA may exempt the employment from CPP. The Canada-US SSA provides that this exemption may also apply when the employee is legally employed by an affiliate during the temporary assignment.

Employers should maintain a certificate of coverage to evidence that the employee is subject to his or her home pension system. Certificates of coverage may be requested from the CRA or the appropriate pension authority in the other country.

If the CPP contribution rate is lower than the rate in the employee’s home pension system, it may be beneficial from a cash flow perspective to contribute to the CPP while the employee is on temporary assignment to Canada. This advantage must be weighed against any disadvantages to the employee—for example, if benefits are calculated according to the employee’s higher earning years under his or her home pension system.

Note that employment in Quebec is subject to the QPP instead of the CPP. Quebec negotiates separate SSAs in respect of the QPP.

Kyle Lamothe
Thorsteinssons LLP, Toronto
[email protected]

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation