Are CPP Benefits Taxed for Non-Residents Living in the U.S.

Cross-border taxation of CPP and Social Security

The Canada Pension Plan (CPP) is a contributory retirement benefit that can be paid to former contributors even if they no longer live in Canada. Like residents, non-resident recipients can elect to start receiving CPP any time between ages 60 and 70. The pension can be deposited into a Canadian bank account or into a foreign bank account in a foreign currency; the method of payment does not change how the income is taxed under Canadian rules.

For anyone who has moved abroad, understanding the interaction between the Canadian tax rules and the tax rules of the country of residence is essential. Cross-border retirees should be aware of withholding requirements at source in Canada, the way their country of residence treats foreign pension income, and any relief provided under a tax treaty between Canada and the country where they now live.

How tax on CPP is applied for non-residents

When CPP is paid to a non-resident of Canada, Service Canada normally applies a standard withholding tax of 25% at source. This withholding is applied when the applicant properly indicates non-resident status on their CPP application. For many non-residents, that withholding is the primary Canadian tax obligation related to the CPP pension—there is generally no additional Canadian tax filing required on that CPP income.

However, the Canada–United States tax treaty changes that outcome for U.S. residents. Under the treaty, U.S. residents who receive CPP are eligible for a reduced withholding rate of 0%. In practice, that means if you are considered a U.S. resident for tax purposes, there should be no Canadian tax withheld from your CPP payments. At the same time, Canada grants a similar treatment for Canadian residents who receive U.S. Social Security, and the treaty contains provisions that limit taxation so the two countries do not both fully tax the same pension income.

From the U.S. perspective, residents are taxed on their worldwide income, which includes CPP. The treaty between Canada and the United States treats CPP and U.S. Social Security in a coordinated way: only 85% of the CPP benefit is taken into account for U.S. tax purposes, meaning the remaining 15% is effectively exempt under treaty terms. Practically speaking, a U.S. resident should report CPP on their U.S. tax return, apply the treaty provisions that exclude the 15% portion, and pay tax on the remaining 85% according to U.S. tax rules.

To make accurate reporting easier, Canada issues an NR4 slip (Statement of Amounts Paid or Credited to Non-Residents of Canada) to non-resident recipients of CPP. Providing a copy of that NR4 to your U.S. tax preparer will help ensure the pension is correctly reported on your U.S. return and that treaty benefits are applied where appropriate. In short, if you are a U.S. resident, you generally will not face Canadian withholding on CPP and you will report the pension on your U.S. return with 15% treated as exempt under the treaty.

Rules for Canadians also receiving a U.S. Social Security pension

If you also qualify for U.S. Social Security benefits, receiving CPP can affect those benefits in specific circumstances. One important rule to be aware of is the Windfall Elimination Provision (WEP), a U.S. Social Security rule that can reduce U.S. Social Security benefits for people who receive a pension based on work in another country where they did not pay into U.S. Social Security. The WEP does not apply to everyone, but it can result in a lower U.S. benefit for some retirees who have foreign pension income linked to non-covered work.

In addition to CPP and Social Security interactions, you may be eligible for Canada’s Old Age Security (OAS) if you meet the criteria and you remain entitled as a non-resident. One of the main conditions for OAS while living outside Canada is a minimum period of residence: you generally must have lived in Canada for at least 20 years after the age of 18 to qualify for OAS payments as a non-resident. Another qualifying route is if you lived and worked in a country that has a social security agreement with Canada; the combined periods of residence and work in the foreign country and in Canada must total at least 20 years.

Given the cross-border complexity, it is advisable to keep documentation such as the NR4 tax slip and other pension statements and to share them with your U.S. tax advisor. That will help ensure theCPP is reported properly, treaty provisions are applied correctly, and any potential effects on U.S. Social Security are assessed.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.

Read more from Jason Heath:

• Should you transfer your DC pension plan to a discount brokerage?
• Transferring employer pensions to LIRAs, LIFs and RRSPs
• Understanding your company pension plan
• The tax implications of working abroad for residents and non-residents of Canada