Are you a Canadian resident working for a U.S. company and receiving pension contributions from the U.S. company, such as 401(k) contributions? Or, you might be a U.S. resident who is working in Canada but still receiving pension contributions to your U.S. plans. In these cases, you may be wondering if the pension contributions are deductible on your Canadian tax return. As is the case for most tax questions, the answer is, it depends.
Generally, Canada does not allow for foreign pension contributions to be deducted on the Canadian tax return and vice versa where the U.S. does not allow Canadian pension contributions to be deducted on a U.S. return. But there are exceptions, and we will discuss how Canadian taxpayers might be able to take advantage of this deduction.
There are two matters to look at when figuring out if you qualify for a deduction on your contribution to a foreign pension plan while residing in Canada: the type of work arrangement and the type of pension plan.
Work Arrangements
To be eligible for the exception you must fit into one of the two categories of workers:
- Workers on temporary assignment (Form RC267 in Canada); and
- Cross border commuters (Form RC268 in Canada).
Let’s take a closer look at the two types of work arrangements.
Workers on Temporary Cross-Border Assignments
This exemption applies to workers who are temporarily working in Canada and continue to participate in a qualifying retirement plan offered by their employers in the U.S. For example, if you are on temporary assignment in Canada while contributing to your 401(k), as long as you meet all the requirements, you will be able to deduct your 401(k) contributions on your Canadian tax return.
For this exemption to apply the following conditions must be met:
- The employment income from the temporary assignment must be taxable in Canada;
- You were contributing to the U.S. plan and were not a resident of Canada right before you started working temporarily in Canada;
- You must be on the temporary assignment for no more than five years;
- The contributions are attributable to work performed while on the temporary assignment; and
- You are not participating in a qualifying pension plan in Canada (see below for a list)—the treaty does not allow for double dipping of pension plan contribution deductions.
The pension contributions deductions are limited to the amount allowed under your home country domestic laws. For U.S. workers in Canada, their deduction is limited to the 401(k) contribution limit for that year.
This year, we are likely to see more workers who had worked in the U.S. and were residents of the U.S. for tax purposes previously, but now due to Covid-19, may be working remotely (online) for a U.S. company while residing in Canada. If this arrangement is temporary, you may be able to qualify for this exemption, but each situation would have to be considered on a case-by-case basis.
Cross-Border Commuters
This exemption applies to Canadian residents who commute to work in the United States. For example, if you are commuting to the U.S. and are contributing to a 401(k) through your U.S. employer, you can deduct the 401(k) contributions on your Canadian tax return as long as all the requirements are met.
For this exemption to apply the following conditions must be met:
- The employment income you receive in the U.S. is taxable in the U.S.;
- Your employer is a resident of the U.S. or has a permanent establishment in the U.S.; and
- The contributions are attributable to work performed while an employee of the U.S. company.
Similarly to the above, the contribution deduction limit is limited to your home country’s limit. For Canadian residents, the deduction is limited to the room available in an individual’s RRSP.
Qualifying Pension Plans
To qualify for a deduction, you must meet the conditions for one of the two types of workers discussed above and the pension plan must be considered a qualified pension plan. To qualify, the pension plan must be an employer-sponsored pension plan.
The most common type of employer-sponsored pension plan we see are Group RRSPs in Canada and 401(k)s in the U.S. The key is that the qualifying retirement plan must be an employer-sponsored pension plan. Therefore, plans where you contribute individually, such as Individual Retirement Arrangements (IRAs) in the U.S. and Registered Retirement Savings Plans (RRSPs) or Retirement Compensation Arrangement (RCAs) in Canada would not qualify.
Plans in Canada that do qualify:
- Registered pension plans (RPPs);
- Group RRSPs;
- Deferred profit-sharing plans (DPSPs);
- Any RRSPs and RRIDs funded exclusively by a rollover from any of the above plans.
Plans in the U.S. that qualify:
- 401(a) and 401(k) plans;
- Simplified 408(k) plans;
- 408(p) simple retirement plans;
- 403(a) and 403(b) plans;
- 457(g) plans;
- Thrift Savings fund;
- Any IRA funded exclusively by a rollover from any of the above plans.
If you fall into any of these situations and would like to ensure you are getting the most out of your tax deductions, please feel free to reach out to one of our cross-border specialists.