Human Resource
Services webcast
Foreign pension plans: Impact
on Canadian companies and
their employees
Administrative information
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May 28, 2013 PwC
Administrative information
• In order to receive CPD credit for this program, you must stay on for
the entire live program and participate by responding to all interactive polling questions
• CPD credit cannot be awarded for participants who are not logged on
to this webcast as themselves, who participate over the phone, or attend the on-demand version
• For those qualifying for CPD credit, a certificate will be sent shortly
after the webcast to the email address used for registration
• The certificate will acknowledge one hour of structured learning
towards the Institute of Chartered Accountants of Ontario CPD requirement or similar accreditation
Agenda
• Types of employees that participate in foreign pension plans • Classification of foreign pension plans
• Issues relating to Canadian residents participating in foreign plans Employees on assignment in Canada
Canadian residents working primarily outside of Canada Canadian residents working primarily within Canada • International pension plans
• Canadian residents receiving distributions from foreign plans • Summary & conclusion
May 28, 2013 PwC
Types of employees that participate in foreign
pension plans
• Three broad groups of employees that participate in foreign pension plans
Employees in Canada on a temporary assignment and who remain
in their home country employer’s pension plan
Canadian residents who work outside of Canada for a foreign
employer
Canadian residents who work for a Canadian employer yet
participate in the pension plan of a foreign corporation affiliated to their Canadian employer
Polling question #1
Does your organization have employees participating in foreign pension plans?
• Yes • No
• Not sure
• PwC participant
May 28, 2013 PwC
Classification of foreign pension plans
• Treatment of contributions to and payments from foreign pension
plans is dependent on how the plan is classified for tax purposes
• There are three classifications:
Salary deferral arrangement (SDA)
Retirement compensation arrangement (RCA) Employee benefit plan (EBP)
Classification of foreign pension plans
Salary Deferral Arrangements (SDAs)
• Employee entitled to receive an amount in a future year
• Payment in lieu of salary for services performed in the current year or
previous year
• One of the main purposes is to postpone payment of tax • Exceptions:
Registered pension plans
Arrangements to fund certain employee leaves of absence Bonuses paid within 3 years
• SDA rules generally do not apply as main purpose of retirement plans
is not to postpone tax
May 28, 2013 PwC
Classification of foreign pension plans
Retirement Compensation Arrangements (RCAs)
• Contributions are made by an employer to a custodian
• Funds are held in trust with the intent to eventually distribute: On retirement of the employee
On loss of employment; or
Classification of foreign pension plans
Retirement Compensation Arrangements (RCAs) Employee consequences:
• Taxed in the year of distribution from the plan
Employer consequences:
• Deduction for amounts contributed to the plan
• Contributions to the plan subject to a 50% refundable tax • Earnings within plan also subject to 50% refundable tax
• Custodian can apply for a refund of tax when distributions made
from plan
May 28, 2013 PwC
Classification of foreign pension plans
Retirement Compensation Arrangements (RCAs)
• Some exceptions to RCAs: Registered Pension Plans
Deferred Profit Sharing Plans Employee Profit Sharing Plans
Plans maintained primarily for the benefit of non-residents for
Classification of foreign pension plans
Employee Benefit Plans (EBPs)
• Contributions are made by an employer to a custodian • Payments are made to or for the benefit of employees • Some exceptions to EBPs:
Registered Pension Plans
Deferred Profit Sharing Plans Employee Profit Sharing Plans Group Sickness or Accident Plans Private Health Services Plans
May 28, 2013 PwC
Classification of foreign pension plans
Employee Benefit Plans (EBPs) Employee consequences:
• Taxed in the year of receipt of payment from the plan • Distribution generally treated as employment income
Employer consequences:
Classification of foreign pension plans
Summary
• SDA – excluded from SDA treatment as objective of plan is not to defer tax but to provide for retirement
• RCA – excluded from RCA treatment where plan maintained primarily for the benefit of non-residents for services performed outside of Canada
• EBP – most foreign pension plans will be characterized as EBPs
May 28, 2013 PwC
Employees on assignment in Canada
• Potential for the foreign plan to be treated as an RCA as services are
being performed by the employee in Canada
• A specific exception from RCA treatment is allowed for foreign plans
with members on temporary assignment in Canada where:
The employee was a member of the foreign plan prior to becoming
a resident of Canada
Contributions were made for services rendered by the employee
during their period of Canadian residency
The employee has not been a resident of Canada for more than 5 of
the 6 years preceding the services for which a contribution was made
Employees on assignment in Canada
• In general, all foreign pension plans will be treated as an EBP for the
first 5 years the employee is resident in Canada
• Employer contributions are deductible if:
Plan custodian is a non-resident of Canada
Employee was a member of the plan prior to becoming a resident
of Canada; and
Employee was a resident of Canada for no more than 5 of the 6
years prior to the date on which the services were rendered
May 28, 2013 PwC
Employees on assignment in Canada
Pension Adjustment (PA) reporting:
• PA limits the amount an employee can contribute to an Registered
Retirement Savings Plan (RRSP)
• In general, for the first 5 years the employer is required to compute
Employees on assignment in Canada longer than 5
years
• Where the employee is resident in Canada for longer than 5 years, the foreign plan will be treated as an RCA
• After 5 years, the employer has 3 options:
1. Do nothing and be subject to RCA rules
2. Elect out of RCA rules - plan continues to be treated as an EBP 3. Localize the employee
May 28, 2013 PwC
Employees on assignment in Canada longer than 5
years
Employer consequences
RCA Treatment EBP Treatment Localize Deduction for
contributions
In year of contribution
In year of distribution
In year of contribution Income tax 50% refundable
tax assessed
n/a -not resident in Canada
n/a – Canadian registered plan PA reporting on
Form T4
Not required Yes Yes
Employees on assignment in Canada longer than 5
years
• Conditions to be met to be eligible to elect for EBP treatment: Employee not a member of a Canadian RPP or DPSP
The pension plan is in a taxing foreign jurisdiction and qualifies
for relief as a pension plan in that jurisdiction
• Employer must notify the Minister of National Revenue in writing
before February 28 of the year following the year the employee meets the 5 year test
• Election is on a plan by plan basis
May 28, 2013 PwC
Polling question #2
Has your organization filed an election to extend EBP treatment to a foreign plan?
• Yes • No
• Not aware of this option • PwC participant
Employees on assignment in Canada
Employee consequences
• Certain tax treaties with Canada allow a deduction to the employee
for contributions to foreign plans (e.g. US, UK, Germany, France)
• Employee needs to complete and file with tax return:
Form RC 267 - Employee Contributions to a United States
Retirement Plan – Temporary Assignments
Form RC 269 - Employee Contributions to a Foreign Pension Plan
or Social Security Arrangement – Non-US Plans or Arrangements
May 28, 2013 PwC
Employees on assignment in Canada
Employee consequences
Deduction for contributions allowed where:
• Employee participating in plan on a regular basis prior to performing
services in Canada
• Contributions relate to services performed in Canada and were made
during the period those services were performed
• The remuneration for those services is taxable in Canada
• The maximum period for which deductions can be claimed is 5 years • The contributions would normally be deductible in the home country
Employees on assignment in Canada
Example
Mary is a US expatriate on assignment to Ontario, Canada for a 3 year assignment. Mary continues to contribute to the US company’s 401(k) plan. Mary is a resident of Canada for the duration of her assignment. Assume for 2013 Mary earns $200,000 and contributes the maximum of $17,500 to her 401(k) plan.
Impact of tax deduction:
• Tax savings to Mary (if not equalized) = $8,122
• Tax savings to company (if Mary is tax equalized) = $15,155
May 28, 2013 PwC
Canadian residents working primarily outside of
Canada
• Employer is a non-resident of Canada
• Still need to determine whether the plan is an RCA or an EBP
• Not an RCA as foreign plan maintained primarily for the benefit of
non-residents in respect of services performed outside of Canada
• Hence most foreign plans will be classified as EBPs
Employer consequences
• Corporate deductibility not applicable as entity not a resident of
Canada
Canadian residents working primarily outside of
Canada
Employee consequences a. Employees working in the US
• For employees commuting and working in the US, a deduction is
allowed for contributions to their employer’s US pension plan
• The following conditions must be met:
The employer must be a resident of the US or have a permanent
establishment in the US
The services must be performed in the US
Remuneration for those services must be taxable in the US
May 28, 2013 PwC
Canadians residents working primarily outside of
Canada
Employee consequences a. Employees working in the US
• Deduction on Canadian return is limited to the lesser of: The amount deductible in the US
The RRSP deduction room remaining after any RRSP
contributions taken for the year
• Form RC268 – Employee Contributions to a US Retirement Plan –
Cross Border Commuters must be completed and filed with
employee’s tax return
Canadians residents working primarily outside of
Canada
b. Employees working in jurisdictions other than the US
• For countries other than the US, currently no ability for the employee
to take a deduction for contributions to foreign plans
• Administratively, the CRA expects the employee to calculate and
report the PA annually on their income tax return (where no Form T4 produced by the employer)
• Different calculations required depending on whether the foreign
plan is a defined contribution plan or a defined benefit plan (CRA publication T4084 – Pension Adjustment Guide)
May 28, 2013 PwC
Tax savings to employee commuting to the US
Example
Mark is resident of Lacolle, Quebec working in Plattsburgh, New York for a US employer. Assume for 2013 Mark earns $200,000 and
contributes the maximum of $17,500 to his 401(k) plan. Impact of tax deduction:
• Tax savings to Mark as a result of deduction of $17,500 on tax return:
Canadian residents working primarily within
Canada
Scenario
ABC hires an executive to work in Canada. The employee wishes to participate in the company’s US affiliate’s company supplemental pension plan. What are some of the issues the company needs to consider?
Response:
• One needs to determine whether the plan is an SDA or an RCA
• Need to review the main purpose for joining the plan - to postpone
tax or to provide for additional funds for retirement?
• If to postpone tax -- SDA treatment
• If for additional funds for retirement, the plan is likely an RCA
May 28, 2013 PwC
International Pension Plans
• An International Pension Plan (IPP) is a vehicle used to provide for
retirement for internationally mobile employees
• Usually established as an irrevocable trust in a non-tax jurisdiction
(e.g. Guernsey, Channel Islands) or as an insurance arrangement
• Some of the reasons a company may implement an IPP:
An increase in expatriate employee population from various
countries
To provide a competitive benefit package to recruit and retain high
performance expatriate employees
To provide top up retirement benefits for key executives As part of setting up a Global Employment Company (GEC)
Polling question #3
Has your organization considered an international pension plan?
• Yes • No
• Not sure
• PwC participant
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
• In general, foreign pension plan payments are taxable in Canada in
year of receipt
• Need to review when contributions were made to plan and the
characterization of plan (RCA or EBP) at that time to determine how the income will be taxed and whether any treaty relief
Canadian residents receiving distributions from
foreign plans
Resident Status When Services Performed
Services in Canada Services Outside of Canada
Resident EBP
Distributions are taxable as employment income
RCA
Distributions are taxable as pension income
EBP
Distributions are taxable as employment income
Non-Resident Foreign Pension
Distributions are taxable
Foreign Pension
Distributions are taxable
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Example
Sue, a Canadian resident, was on assignment from Australia to Canada from 2010 to 2012. In 2013, Sue decided to retire from her position and opted to remain in Canada as she grew to love the country.
Prior to Sue’s assignment she participated in her employer’s pension plan. While on assignment, Sue continued to participate in the
Australian company pension plan. Now that Sue is retired, she is
eligible to receive $5,000 per month from her company pension plan - $2,000 relates to contributions made during Sue’s Canadian service period and the balance relates to her Australian service period.
Canadian residents receiving distributions from
foreign plans
Answer:
• $2,000 contributed during Canadian service period as a resident of
Canada taxed as employment income (foreign plan treated as an EBP)
• $3,000 contributed during Australian service period as a
non-resident of Canada taxed as pension income
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Example, continued
Of the $2,000 payout relating to Sue’s service period in Canada, $500 represents her own contributions to the pension plan
Answer:
• Since $500 represents a return of contributions and no deduction
was allowed on Sue’s tax return for her contributions, only $1,500 is to included as employment income
Canadian residents receiving distributions from
foreign plans
Example
Robert worked in the US for 5 years. During this period he was a non-resident of Canada and participated in the company’s 401(k) plan. On returning to Canada, Robert left his pension in the 401(k) plan,
intending to withdraw amounts on retirement. Robert has recently retired from the company and has elected to receive a lump sum payment.
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer:
• Robert is taxable on the full amount of the payment from the plan in
the year of receipt. Robert has the option of transferring the payment to an RRSP, thus able to defer taxation on the amount until
withdrawn from the RRSP
• Robert can transfer the amount to an RRSP where:
The foreign plan meets the requirements of a pension plan under
the Act
The payment must be in the form of lump sum
The amount received must relate to services performed by the
Canadian residents receiving distributions from
foreign plans
Example
Pierre worked in France for 5 years. During this period he was a non-resident of Canada and participated in the company’s pension plan. On returning to Canada, Pierre left his pension in France intending to
withdraw amounts from the plan on retirement. Pierre has recently retired from the company and has elected to receive a lump sum payment.
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer:
• Pierre is taxable on the full amount of the payment from the plan in
the year of receipt
• However, paragraph 1, Article 18 of the Canada – France Tax Treaty
would exempt the amount from taxation in Canada
• As the lump sum amount is exempt under Treaty, Pierre is unable to
Canadian residents receiving distributions from
foreign plans
Example
Sandra recently returned to Canada after working for 8 years in the US. During this period she was a non-resident of Canada and participated in the company’s pension plan. What are Sandra’s options with respect to the amounts in the US pension plan?
May 28, 2013 PwC
Canadian residents receiving distributions from
foreign plans
Answer: Option 1
• If allowed by the plan, Sandra can leave the funds in the company US
plan until she is ready to retire Option 2
• Sandra can transfer the funds to a US Individual Retirement Account
(IRA) on a tax free basis (both US and Canada) and leave the funds there until retirement
Canadian residents receiving distributions from
foreign plans
Option 3
• Sandra can transfer the funds from the US plan to a Canadian RRSP
(or RPP)
• Sandra will be subject to US income tax on the lump sum amount
withdrawn from the plan and to a early withdrawal penalty of 10%
• Sandra has to transfer the amount received to an RRSP (or an RPP)
within 60 days of the end of the year. A deduction for the
contribution to the RRSP (or RPP) can be claimed on her tax return with no affect to her RRSP contribution room.
• A foreign tax credit can be claimed on her Canadian return for US
taxes paid
• Caution: Not able to transfer employer contributions to RRSP
May 28, 2013 PwC
Polling question #4
Who in your organization is responsible for overseeing foreign pension plan participation?
• HR function • Tax function
• Global mobility function • Other / PwC participant
Summary and conclusion
• Employees are more and more concerned about their pension
entitlements
• Companies need to provide assurances that there will be minimal
affect to employee pensions whilst on foreign assignment
• Companies also need to ensure proper reporting of foreign pension
plan participation and that any cost savings accrue to company
• Companies can also provide employees with some planning for those
transferring with pensions earned in other jurisdictions
May 28, 2013 PwC
Q & A
Jerry Alberton
[email protected] 416 365 2746
Chantal Farrell-Carter
[email protected] 514 205 5370
Teresa Malowany
[email protected] 514 205 5283
HRS Podcasts
Our current “What If” podcast series may be of interest to you.
Please visit http://www.pwc.com/ca/tax and click on the Tax Tracks Podcast section to access these recent podcasts, as well as a library of additional podcasts.
1. Payroll issues with respect to expatriate’s stock option grants, with presenter Carola Trolley
2. Payroll issues for cross-border employees receiving incentive compensation, with presenter David de Souza
3. Significant tax implications to Canadian residents working for a US employer in the US, with presenter Vasu Krithigaivasan (coming June 4th)
4. Significant tax implications to Canadian residents working for a US employer in Canada, with presenter Linda Lee (coming June 18th)
May 28, 2013 PwC
Thank you!
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
