Moving to Canada from the U.S. with your current employer can be an exciting opportunity, both personally and professionally. Developing a cross-border financial plan that proactively coordinates the investment, tax, and financial planning components is critical. The focus of this article centers on the employment considerations when moving within your company from the U.S. to a Canadian entity.
U.S. Entity
Compensation derived on U.S. payroll can vary depending on the specific laws and regulations at the federal, state, and local levels, as well as the policies of individual employers. Here are some common (although not all-inclusive) components of U.S. payrolls :
- Gross Pay: This is the total amount of compensation an employee earns before any deductions are taken out. It includes regular wages/salary, overtime pay (if applicable), bonuses, commissions, vesting of restricted stock units, and any other forms of compensation.
- Federal Income Tax: Federal income tax is withheld from an employee’s paycheck based on their filing status, allowances claimed on Form W-4, and taxable income.
- State Income Tax: Many states impose income tax on wages earned within the state. The amount withheld for state income tax varies depending on the employee’s state of residence and the applicable tax rates.
- FICA Taxes: FICA (Federal Insurance Contributions Act) taxes consist of Social Security and Medicare taxes. Employees and employers each contribute a percentage of the employee’s wages to fund these programs. The employee’s share of FICA taxes is withheld from their paycheck.
- Social Security Tax: Social Security tax is withheld at a flat rate of 6.2% on wages up to a certain limit set by the IRS each year ($168,600 for tax year 2024). Employers also contribute an equal amount for each employee.
- Medicare Tax: Medicare tax is withheld at a flat rate of 1.45% on all wages, with no income limit. As is the case with Social Security tax, both employees and employers contribute to Medicare, and Employers contribute another 1.45% of total wages. A 0.9% Additional Medicare tax applies to wages and self-employment income that exceed the following threshold amounts based on filing status for 2024: $250,000 for married filing jointly; $125,000 for married filing separately; and. $200,000 for all other taxpayers.
These are just some of the more common payroll items you might encounter on a U.S. paycheck but there are many more. The specific items and their amounts will vary depending on factors such as employee earnings, benefits eligibility, state of residency, and individual circumstances. Remaining on U.S. payroll as a Canadian resident who performs services from Canada can lead to a multitude of tax issues. Therefore, a shift to Canadian payroll is necessary upon relocation, in order to properly adhere to the tax laws of the worker’s new “home” tax residency base.
Canadian Entity
In Canada, payroll items are governed by federal and provincial regulations, and they can vary based on factors such as the type of employment, industry, and specific agreements between employers and employees. Here are some of the more common components of Canadian payrolls:
- Gross Pay: This is the total amount of compensation an employee earns before any deductions are taken out. It includes regular wages/salary, overtime pay, bonuses, commissions, executive compensation, and any other forms of compensation (similar to how it works in the U.S).
- Federal Income Tax: Federal income tax is withheld from an employee’s paycheck based on their taxable income and the tax brackets set by the Canada Revenue Agency (CRA). The amount withheld is determined using federal tax tables provided by the CRA.
- Provincial Income Tax: Most provinces and territories in Canada impose their own income tax on wages earned within their jurisdiction. The amount withheld for provincial income tax varies depending on the employee’s province or territory of residence and the applicable tax rates.
- Canada Pension Plan (CPP) Contributions: CPP is a mandatory contribution to Canada’s public retirement pension plan. Both employees and employers contribute a total percentage of 5.95% of the employee’s wages, up to a maximum annual limit set by the CRA ($68,500 for tax year 2024). There is then a second CPP contribution rate of 4% on up to $73,200 of earnings for 2024. With a basic exemption amount of $3,500, the maximum employee and employer contributions for tax year 2024 are $4,055.50. The amount doubles for self-employed individuals.
- Employment Insurance (EI) Premiums: EI premiums fund Canada’s employment insurance program, which provides temporary income support to eligible workers who are unemployed or on parental leave. Both employees and employers contribute to EI based on the employee’s earnings, up to a maximum annual insurable earnings amount ($63,200 for 2024). These contributions amount to 1.66% (employee) and 2.3% (employer) of the annual maximum insurable earnings. Unlike CPP, EI does not carry a basic exemption allotment.
- Canada Pension Plan (CPP) and Employment Insurance (EI) Overpayment: When an employee overpays their CPP or EI contributions due to reaching the annual maximum contribution limit before the end of the calendar year, they may be eligible for a refund of the excess contributions. This often occurs when an employee switches jobs during the year and therefore contributes to CPP and EI under both employers.
These are some common items you might encounter on a Canadian payroll, but the list is certainly not all-encompassing. Employers are responsible for accurately calculating and withholding the appropriate amounts for each payroll item in compliance with relevant federal and provincial laws and regulations.
Note: The province of Québec is unique in terms of taxation, tax filing, and payroll withholdings in ways that are beyond the scope of this particular article. Contact Cardinal Point for more information if you reside in Québec.
In some circumstances, especially in the technology sector, there is the specter of continued residual U.S.-sourced income in spite of the shift to the Canadian entity. One such example involves the vesting of Restricted Stock Units (RSUs) resulting from a grant received while on U.S. payroll.
Stock-Settled Restricted Stock Units
A Restricted Stock Unit (RSU) is a form of equity-based compensation commonly used by companies to reward employees. Here’s how U.S. RSUs typically work:
- Grant: When an employer grants RSUs to an employee, they are essentially promising to give the employee a specific number of company shares at a future date.
- Vesting: RSUs usually vest over a specified period of time, often subject to certain conditions such as continued employment or achievement of performance goals. For example, an employer might grant RSUs that vest over a four-year period, with 25% of the RSUs vesting each year. Once RSUs vest, the employee becomes the owner of the underlying company shares.
- Taxation: RSUs are typically taxed as ordinary income at the time of vesting, based on the fair market value of the company stock on the vesting date. The employer withholds applicable taxes, such as federal and state income taxes, Medicare, and Social Security taxes, from the employee’s paycheck at the time of vesting. It is common for the employer to withhold shares to account for these tax withholding criteria.
- Share Delivery: After RSUs vest, the employer will usually deliver the actual company shares to the employee’s brokerage account or directly to the employee, depending on the company’s policies.
- Ownership Rights: Once RSUs vest and the net shares are delivered, the employee becomes a shareholder of the company and is entitled to all the rights and privileges of ownership, including voting rights and dividends, if applicable.
RSUs are often used as a way to align the interests of employees with those of the company and its shareholders, as employees benefit from increases in the company’s stock price over time. They can also serve as a retention tool, as they typically require employees to stay with the company for a certain period of time in order to receive the full benefit of the grant.
Compare & Contrast U.S. vs Canadian Taxation of RSUs
| Canada | U.S. | |
| Taxation at Vesting | Taxed as employment income | Taxed as employment income |
| Determination of FMV | CAD value at time of vesting | USD value at time of vesting |
| Tax Withholding | Income tax, CPP, EI – CRA | Income tax, FICA taxes – IRS |
| Reporting Requirements | Wage Income on T4 | Wage Income on W2 |
| Capital Gains Tax | *50% capital gain inclusion X MTR | Short Term vs Long Term |
*Note: On June 25th, the inclusion rate on Canadian capital gains that exceed $250,000 CAD is set to increase to 67%.
How does a Canadian resident allocate RSU income that is sourced from a U.S. grant?
Depending on the circumstances, the U.S. grant can potentially continue to vest over a multi-year period post relocation to Canada. It is important to understand the cross-border income tax sourcing of future RSU vesting on the U.S. grant.
All shares that vest prior to Canadian relocation are taxed solely in the U.S. and reported on the U.S. 1040 tax return.
Post-Canadian relocation, there will be a pro-rata calculation performed to assess the sourcing of this RSU income. The greater the spread between grant and vesting dates, the greater the percentage increase in RSU income allocated to Canada. The RSU income sourced to the U.S. gets reported on a W2 form with the income allocated to Canada reported on a T4 form. Practically speaking, this is an HR/payroll item within your company. Ultimately, the tax reporting will follow the tax slips − and we’ve seen tech companies report things in different ways.
If you were to sell vested RSUs as a Canadian tax resident and U.S. citizen or Green Card holder, there would be both a Canadian and a U.S. gain. The U.S. gain would carry a cost basis equal to the vesting date. The Canadian cost basis would be either the “deemed acquisition date” or the post-Canadian relocation vesting date, and converted to CAD. At Cardinal Point we would help you quantify the Canadian and U.S. capital gains tax ramifications.
In Conclusion
Navigating the cross-border financial planning world on your own can be an intensely complicated process. This article offers information and insights that only cover a small fraction of the complex issues and tax rules that should be explored and followed when moving from the U.S. to Canada. Working with an experienced and qualified cross-border wealth manager can help minimize the stresses involved in cross-border tax and financial planning. For more information on your specific circumstances, please contact Cardinal Point.