U.S. and Canadian employers would be able to deduct pension contributions for cross-border employees under proposed amendments to the United States-Canada Income Tax Treaty.

The revised treaty would shield against negative tax consequences for cross-border employees—residents of one country commuting to or temporarily living and working in the other country. It would allow employers to claim deductions for pension contributions made to qualified retirement plans in the other country on behalf of cross-border employees.

While the current treaty addresses tax issues related to the distribution of pension benefits, there are no provisions governing pension contributions, meaning that cross-border employees and their employers could be taxed on contributions.

"Bottom line, it was not satisfactory trying to figure out the tax treatment," said Julie Y. Lee, a partner with the tax department and a member of the pension and benefits division of Osler, Hoskin & Harcourt L.L.P. in Toronto.

For example, Canadians who live in Windsor, Ontario, and commute to their jobs in Detroit and participate in their U.S. employer's 401(k) plan could have those contributions taxed in Canada, said Marcel Theroux, a consultant in the legal and tax department of Mercer L.L.C. in Toronto. "It was not a good scenario," he said.

The amendments would allow Canadian commuters to deduct their contributions to U.S. 401(k) and other qualified plans within deduction limits and not face any negative tax consequences in Canada, he said.

Meanwhile, U.S. commuters participating in qualified Canadian employer pension plans also would be able to deduct their contributions within deduction limits.

In addition, residents of one country who move to the other country on short-term work assignments—up to five years in a 10-year period—and continue to participate in pension plans in their home country would be able to deduct those contributions within deduction limits.

"Because a person is not moving permanently, they much prefer to continue coverage in the home country plan," Ms. Lee said.

For example, an employee of a Canadian company who is assigned to work three years for a U.S. subsidiary and continues contributing to the Canadian pension plan would be able to deduct those contributions for U.S. tax purposes. A U.S. employer also would be able to deduct contributions made to a Canadian pension plan on behalf of the employee.

"It makes it a lot easier to move across the border and continue to participate in your country's plans," Mr. Theroux said.

Canadian employers, meanwhile, could claim deductions for contributions to U.S. plans on behalf of their cross-border employees, who also could deduct their contributions.

Companies on both sides of the border transferring employees often found it difficult to abide by the current treaty because of the uncertain tax treatment for pension contributions.

"There's an awful lot of noncompliance under the current rules," Mr. Theroux said. "What you get is a type of paralysis and people look the other way."

The United States is the No. 1 source country for foreign workers in Canada, with 24,830 Americans working in Canada as of Dec. 1, 2006, according to Citizenship and Immigration Canada, the government immigration bureau.

In 2000, 58,465 Canadians worked in the United States on a temporary basis, according to the U.S. Census Bureau study that year, the latest data available.

The changes would remove a possible disincentive for commuters and temporary work assignments, observers say.

"I think this really will help," Ms. Lee said.

The amended tax treaty must be ratified by the governments of both countries. In the United States, the treaty must be approved by the U.S. Senate Committee on Foreign Relations followed by the full Senate, while the treaty must be approved by the House of Commons in Canada.

If ratification occurs before the end of 2007, the amendments become effective for tax years that begin in 2008. Otherwise, the changes would apply to tax years that begin the calendar year after the amendments are ratified.

Industry experts said they believe the amendments would be approved by both nations, but said it is unlikely that the governments would take action by the end of this year.