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We have a Canadian subsidiary. The managing director is a U.S. citizen, on assignment in Canada. He is paid in Canadian dollars. We use ADP Canada to do the payroll transaction. There is a U.S./Canada treaty that allows him to elect to be exempt from the Canadian pension system, and remain an active participant in the U.S. Social Security and Medicare systems. To that end, FICA (6.2 percent) and Medicare (1.45 percent) tax is being withheld from his pay on the Canada payroll.
The issue we are having is that ADP Canada has informed us that they do not have the capability to remit the withheld monies to the U.S. Social Security system. We have called ADP U.S., but they have not found us a solution. We investigated using the voucher system along with the quarterly 941 payroll filings, but the IRS told us that won't work because the 941s/940 have to be in agreement with the W2. Given that our person is under the Canada payroll system, no W2 would be issued. How do we remit the withheld FICA and Medicare tax, as well as the employer matching contribution, in this scenario?
Paul Salvucci (salvucci@tscg.biz )
Response:
The key words are "on assignment," which suggests it is temporary. The manager should be paid in U.S. dollars and be on a U.S. payroll, which will solve the withholding and reporting problem. I am trying to guess why you decided to pay the director in Canadian dollars. Did the director move his/her family to Canada? On a temporary assignment, the company would probably pay an allowance or reimburse expenses for housing and possibly transportation (a car?) in Canadian dollars, so that this large portion of expenses is not influenced by changing exchange rates. With the pay in Canadian dollars, the company could be creating an awkward situation if the Canadian dollar gains appreciably while the director is working in Canada. When the director returns to the U.S., he or she will want the U.S. compensation to be at the higher rate based on gains realized while in Canada, due to the higher exchange rate.
Ed Clarke (eclarke3@aol.com )
Response:
I’ve also dealt with the Canada-U.S. Tax Treaty on the Social Security/Canada Pension Plan, although it was a couple of employers ago. It got messy; I think we ended up making contact with Social Security and remitting the tax outside the context of our annual returns. If the employee will be in Canada for only a few years, it’s easier to just pay Canadian UIC and CPP rather than FICA. It’s much cheaper (for both employer and employee) and easier. Also, if the person is going to be near the top of the U.S. tax brackets anyway (as I would suspect for a managing director), it may not have any effect on their future earnings from FICA.
Anonymous
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