Plan administrators attending the International Foundation of Employee Benefit Plans’ session on Retirement Arrangements on June 17 in Toronto learned that while Canadian and American employers are not required to establish pension plans for their employees, for those that do, there are significant differences.
Janet Downing, a lawyer and senior consultant with Watson Wyatt Worldwide, discussed some of the key differences between the two countries’ pension systems.
Cross-border tax issues
As a result of the fifth protocol to the Canada-U.S. Tax Convention, employees who are cross-border commuters or who are on short-term transfer can participate in qualifying retirement plans (QRPs) without any negative tax consequences for contributions or accruals. And employers can claim deductions for contributions made to these plans.
That means, a Canadian resident working in the U.S. may participate in a U.S. pension plan. The employee may deduct any contributions—employee and employer—made to the U.S. plan, up to the limits of an equivalent Canadian plan, and with no tax on accruals.
For short-term cross-border assignments—in other words, a resident of Canada who is temporarily sent to work in the U.S.—the employee can continue to participate in a Canadian QRP for up to five years. The employee can deduct contributions up to the limits applicable to the QRP in Canada. There is no U.S. tax on accruals in Canadian QRPs. And the U.S. employer may deduct contributions to a Canadian QRP up to the Canadian limits.
What’s the difference?
| Canada | U.S. |
Plan registration | • registered with the Canada Revenue Agency and the applicable pension standards regulatory authority of the province where the plan is administered | • registered with the Department of Labor |
Regulatory jurisdictions | • plan is subject to one of 10 provincial pension benefits standard rules or the federal standard rules (regulated by the Office of the Superintendent of Financial Institutions) | • plan is subject to one set of rules under ERISA |
Legal perspective | • much of the pension law is left to the interpretation of the court | • pension law is organized and based on contract law |
Insurance for pension benefits | • only Ontario has very limited insurance protection for DB plans (through the Pension Benefits Guarantee Fund) | • companies can rely on the Pension Benefit Guaranty Corporation for pension benefits insurance |
To comment on this story, contact us.