Human Resource Services webcast Foreign pension plans: Impact on Canadian companies and their employees
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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 3
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 4
Polling question #1 Does your organization have employees participating in foreign pension plans? Yes No Not sure participant 5
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) 6
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 7
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 On substantial change in the services of the employee 8
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 9
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 services performed outside of Canada 10
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 11
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: Deduction allowed only in the year of distribution 12
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 13
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 14
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 15
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 and report a PA on Form T4 16
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 17
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 PA reporting on Form T4 50% refundable tax assessed n/a -not resident in Canada n/a Canadian registered plan Not required Yes Yes Administration Increased administration 18
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 19
Polling question #2 Has your organization filed an election to extend EBP treatment to a foreign plan? Yes No Not aware of this option participant 20
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 21
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 22
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 23
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 Required to report a PA on Form T4 24
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 25
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 Form also calculates the PA to report on the employee s return (where no Form T4 produced by the employer) 26
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) 27
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: ($17,500 x 49.97%) = $8,745 28
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 29
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) 30
Polling question #3 Has your organization considered an international pension plan? Yes No Not sure participant 31
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 32
Canadian residents receiving distributions from foreign plans Resident Status When Services Performed Resident Non-Resident Services in Canada EBP Distributions are taxable as employment income RCA Distributions are taxable as pension income Foreign Pension Distributions are taxable Services Outside of Canada EBP Distributions are taxable as employment income Foreign Pension Distributions are taxable 33
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. How will the $5,000 be taxed in Canada? 34
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 nonresident of Canada taxed as pension income 35
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 36
Canadian residents receiving distributions from foreign plans Example Robert worked in the US for 5 years. During this period he was a nonresident 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. 37
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 individual while a non-resident of Canada The amount must be taxable and not exempt from tax under treaty 38
Canadian residents receiving distributions from foreign plans Example Pierre worked in France for 5 years. During this period he was a nonresident 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. 39
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 transfer the amount to an RRSP 40
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? 41
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 42
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 43
Polling question #4 Who in your organization is responsible for overseeing foreign pension plan participation? HR function Tax function Global mobility function Other / participant 44
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 45
Q & A Jerry Alberton jerry.alberton@ca.pwc.com 416 365 2746 Chantal Farrell-Carter chantal.farrell-carter@ca.pwc.com 514 205 5370 Teresa Malowany teresa.malowany@ca.pwc.com 514 205 5283 www.pwc.com/ca/hrs 46
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 4 th ) 4. Significant tax implications to Canadian residents working for a US employer in Canada, with presenter Linda Lee (coming June 18 th ) 47
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