If you’re a U.S. citizen living in Canada, you may be wondering about the impact on your U.S. Social Security benefits. Or maybe you’re a Canadian citizen with questions about how your U.S. residency will impact your CPP/OAS benefits. What are the tax implications for these programs when you live across the border?
Fortunately, there’s been a lot of cooperation between the U.S. and Canada on the subject of Social Security. Since 1984, a totalization agreement has been in place between the two nations regarding their respective Social Security programs. (Note: Quebec has its own agreement because of a special pension plan operated in that province.)
In a nutshell, those who have earned Social Security credits in either country may qualify for benefits from one or both countries. Those meeting the necessary requirements under one country’s program will get a regular benefit from that country. Those who don’t meet the basic requirements may still qualify for a benefit under the totalization agreement.
U.S. Social Security Benefits for Americans Living in Canada
Let’s look at a case study as an example. Our client Robert is a U.S. citizen who lived and worked in the U.S. for 25 years before moving to Canada for a job five years ago. He plans to work for five more years before retiring in Canada. Robert came to us with questions about Social Security benefits since he has lived abroad and plans to retire outside the U.S.
When it comes to taxes, the totalization agreement between the U.S. and Canada is quite favorable to Robert when it comes to the taxation of his U.S. Social Security benefits. These benefits will be subject to tax only in Canada, meaning Robert will be taxed the same way as other Canadian residents even though he’s a U.S. citizen. Here’s the math. In his Canadian taxable income, Robert will include 85% of his Social Security benefits and the remaining 15% will be exempt from Canadian taxes.
Robert’s Canadian tax situation will determine how much Canadian tax, if any, Robert will pay on his U.S. Social Security benefits. Of course, if Robert retired in the U.S., the tax would be lower, but in this situation, the additional tax isn’t too onerous.
CPP/OAS Benefits for Canadians Living in the U.S.
How does it work with the Canada Pension Plan (CPP) and Old Age Security (OAS) benefits from Canada? What if our case study example Robert was a Canadian citizen residing in the U.S.?
Essentially, if Robert was a Canadian living in the U.S., his benefits would only be taxable in the U.S. When it comes to taxes, the Internal Revenue Service sees CPP/OAS benefits as equivalent to U.S. Social Security benefits. This means that Robert should report this income on his 1040 form, and it will be taxed at the 85% inclusion rate. Another upside of the U.S./Canada totalization agreement: CPP and OAS income aren’t taxable in Canada and aren’t subject to Canada Revenue Agency withholding for non-residents.
Need help exempting your U.S. Social Security benefits from U.S. taxes? Questions about the taxation of your CPP or OAS? Whichever side of the border you’re on, the cross-border experts at Cardinal Point Wealth Management can help you maximize your benefits and avoid double taxation of your income.
Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years. He is active as an author, speaker, and educator on international tax and financial planning matters. www.cardinalpointwealth.com