Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts, takes times from her day job each week to answer a question from the public about the Social Security claiming process. Her response this week may come as a surprise to even experienced financial advisors: Yes, Canadians can participate in the U.S. Social Security system.
This week’s question came from a married couple who are Canadian citizens, with the wife having worked principally in the United States and the couple having been married for more than 35 years. The wife, it turns out, will likely be eligible for Social Security benefits, and her husband will also likely be eligible for spousal benefits under the retirement income insurance program.
“A Canadian spouse of a Canadian-citizen U.S. worker can usually claim Social Security benefits, including survivor, spousal and dependent benefits,” Shedden wrote. “This is possible because of the Social Security agreement between the two countries.”
The agreement, struck in 1984, allows people to combine their work and residency history in both countries to qualify for benefits in their home nation. It can also potentially reduce or eliminate restrictions based on citizenship or payment of pensions abroad.
As Shedden has previously told ThinkAdvisor, it’s vital for financial advisors to understand the nuances of Social Security claiming — or at least to connect their clients to experts who can help them make the most of their benefits. To that end, advisors with cross-border clients should study up on the U.S.-Canada Social Security agreement as detailed in a guide on the SSA website.
Cross-Border Basics
As the SSA’s guide recounts, the 1984 agreement was intended to improve retirement income protections for people who work or have worked in both countries. It also helps protect the benefit rights of people who have earned Canadian Social Security credits based on residence and contributions in Canada.
Because the Canadian Social Security system includes a special pension plan operated in Quebec, an additional “understanding” has been struck with the province to extend the agreement to that province — likewise effective Aug. 1, 1984.
Decades later, the agreement with Canada continues to help many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings avoid most double taxation, according to the SSA.
For the United States, the agreement covers Social Security taxes (including the Medicare portion) and Social Security retirement, disability and survivors insurance benefits. It does not, however, cover benefits under Medicare or the Supplemental Income program. For Canada, the agreement applies to the Old-Age Security program and the Canada Pension Plan.
Tax and Benefit Considerations
If a client’s work is covered by both the U.S. and Canadian Social Security systems, the client (and their employer) would normally have to pay Social Security taxes to both countries. However, the agreement eliminates this double coverage, so a worker pays taxes to only one system at a time.
Over time, people may generate Social Security credits in both the United States and Canada but not have enough to be eligible for benefits in one country or the other. The agreement makes it easier to qualify for benefits by letting workers combine their Social Security credits in both countries. The guide includes an extensive table that details how the benefit calculation process will work for people in a variety of situations and potential benefits.
Under the agreement, clients working as an employee in the United States normally will be covered by the United States, and they and their employer will pay Social Security taxes only to the United States. Likewise, if they work as an employee in Canada, they normally will be covered by Canada, and they and their employer pay Social Security taxes (i.e., contributions) only to Canada.
On the other hand, if an employer sends a client from one country to work for that employer or an affiliate in the other country for five years or less, the individual will continue to be covered by their home country, and they will be exempt from coverage in the other country.
Even if their occupation — such as a truck driver or professional athlete — requires clients to make frequent trips from one country to the other over a period of more than five years, each trip can be considered separately. This allows the workers to remain covered only by the country from which they are sent.
Also notable, clients who are self-employed and reside in the United States or Canada generally will be covered and taxed only by the country where they reside.
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