Is Canada Cross-Border Retirement Income Taxed by US Treaty (2024)

US-Canada Cross-Border Retirement Treaty US Tax Rules

The United States and Canada have a tax treaty in place — and that tax treaty provides a detailed summary about how foreign retirement is taxed for US Persons, Canadian Nationals, and other residents — depending on the type of retirement plan at issue. In general, when it comes to cross-border retirement tax rules, if there is a tax treaty in place — it will significantly impact the outcome of how certain residents and citizens/nationals are taxed on the resulting income — including how contributions and growth are taxed as well. In discussing retirement and pension income taxation, they are typically three (3) buckets of retirement that taxpayers may have — depending on what sector they worked in (Public vs Private) and what type of investments they have. The three larger categories of retirement income include:

• • • • • Private Pension;

        • Public Pension; and

        • Social Security

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Let’s explore the basics of How US Treaty Taxes Canada Cross-Border Retirement & Pension

Article XVIII Pension

• • • Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.” (b) Annuities may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of an annuity payment, the tax so charged shall not exceed 15 per cent of the portion of such payment that would not be excluded from taxable income in the first-mentioned State if the beneficial owner were a resident thereof.”

Pension Article XVIII Explained

In general, pensions are taxed in the country of residence. Therefore, if a US person who is also a Canadian Citizen, National or former Resident receives income from a foreign pension plan in Canada, the United States has the opportunity to tax that income — because the United States is the country of residence — but with this treaty, there are some additional taxes that can be levied by the source country — subject to certain limitations. It should be noted that Article XVIII is excluded from the saving clause — so it limits the ability to modify the tax implications outside of the treaty rules. Also, if the pension would be tax-exempt in the source country (for example Roth IRA), it will be generally be tax-exempt in the residence country as well.

Article XVIII (5) Social Security

• • • “Benefits under the social security legislation in a Contracting State (including tier I railroad retirement benefits but not including unemployment benefits) paid to a resident of the other Contracting State shall be taxable only in that other State, subject to the following conditions:

      • (a) a benefit under the social security legislation in the United States paid to a resident of Canada shall be taxable in Canada as though it were a benefit under the Canada Pension Plan, except that 15 per cent of the amount of the benefit shall be exempt from Canadian tax; and

      • (b) a benefit under the social security legislation in Canada paid to a resident of the United States shall be taxable in the United States as though it were a benefit under the Social Security Act, except that a type of benefit that is not subject to Canadian tax when paid to residents of Canada shall be exempt from United States tax.”

Social Security Article XVIII (5) is Taxed at Source

Over the past several years, the US and Canada have updated their tax treaty extensively, and now the social security tax rules are more complex — depending on which country makes payment and residence of the taxpayer. In general, a portion of US Social Security is taxable in Canada for US Residents in Canada and conversely, the US can tax certain social security equivalent payments made by Canada to US residents.

IRS Summary on Tax Under Canadian/US Treaty

As provided by the IRS:

Pensions, Annuities, Social Security, and Alimony

• • • Under Article XVIII, pensions and annuities from Canadian sources paid to U.S. residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Canadian pensions and annuities paid to U.S. residents may be taxed by the United States, but the amount of any pension included in income for U.S. tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident.

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