Many Canadian citizens and landed immigrants who hold nonimmigrant
visas and work in the U.S. may be able to avoid paying thousands of dollars in U.S. social
security taxes. Both Canada and the United States have social security systems that afford
benefits to their respective residents and are supported through taxation. The U.S.
Canada Totalization Agreement rescues many people who may be covered by the Canadian
Pension Plan from paying U.S. social security tax for work performed in the U.S.
Under the Agreement, self-employed persons are taxed according to their
place of residence and employees are normally taxed according to where they work. When
employees are transferred from one country to the other on a temporary assignment for five
years or less, they may still be taxed according to their place of normal employment. Thus
an employee of a Canadian business who is transferred to work in the U.S. for less than
five years may remain exclusively subject to Canada Pension Plan payments by seeking
exemption from U.S. social security taxes.
This is an important consideration because U.S. social security tax may
be several thousand dollars higher than its Canadian counterpart. In the U.S., both
employee and employer must pay social security tax in respect of the employee. At current
rates, U.S. social security and related taxes are over $10,000 (USD) per year for a highly
salaried employee. The equivalent Canada Pension Plan payments as of 1999 would be less
than $1,600 (USD). Over $44,000 may be saved during the five-year period in such a case.
An exemption from U.S. social security tax is not automatic and the
employer must obtain a Certificate of Coverage from Revenue Canada to present to the U.S.
Internal Revenue Service. Otherwise, employer and employee may be subject to U.S. social
security taxes. If the employee spends less than 183 days in a calendar year in the United
States, U.S. social security taxes may not apply and a Certificate of Coverage would not
be needed. The availability of a Certificate of Coverage may be a consideration in
selecting staff for U.S. branches of Canadian companies. A Canadian who is hired in the
U.S., as opposed to being transferred from a Canadian business to work in the U.S., will
generally be subject to U.S. and not Canadian social security tax.
Although the Certificate of Coverage may only extend for a maximum of
five years, the employer may apply for another five-year Certificate of Coverage if the
employee returns home to Canada for six months or more. Otherwise, it is not normally
possible to extend the Certificate of Coverage, although extensions of up to 18 months
have been granted where the employee will return to Canada within a short time to retire.
Similar principles apply to self-employed persons who reside in Canada
and are working in the United States. Under the Totalization Agreement, they are subject
to Canadian social security taxes and should apply for a Certificate of Coverage to avoid
liability for U.S. social security taxes as well. Whether a person is employed or
self-employed is decided according to legal rules rather than choice.