The 2015 federal Budget included a proposal to reduce the compliance burden of sending non-resident employees to work in Canada for short durations as of Jan. 1, 2016. While the proposal is welcome, the measures are somewhat limited and may not provide relief in all circumstances, including some fairly common scenarios.
Current State of Affairs
Under the Income Tax Act (Canada) (the "ITA"), an employee who is a non-resident of Canada is liable for tax on income from employment exercised in Canada, subject to exemption under an applicable tax treaty. The person paying the remuneration to such an employee (the "Employer"), whether a resident or a non-resident of Canada, is liable to withhold and remit to the Canada Revenue Agency ("CRA") a prescribed amount on account of the tax liability of the non-resident employee pursuant to section 102 of the regulations made under the ITA ("Reg 102 withholding"). Reg 102 withholding applies regardless of whether the employee may ultimately benefit from an exemption from tax under the ITA by virtue of the application of Canada's bilateral income tax treaty with the employee's home jurisdiction (a "Treaty"). There is also no floor below which the Reg 102 withholding does not apply. The result is an administrative burden, as well as the potential for the employee's wages to be subject to double withholding: once in the home jurisdiction and once in Canada.
Where the employee is entitled under a Treaty to an exemption from Canadian income tax on the income from employment exercised in Canada, the employee may file a tax return with the CRA after the end of the year and claim a refund of the tax withheld and remitted by the Employer. Alternatively, the employee and the employer may apply to the CRA for a waiver of the Reg 102 withholding based on the entitlement to Treaty benefits. While the waiver relieves the potential for double withholding, the waiver process is time-consuming and inefficient (each waiver is for a specific employee and for a specific time period). Further, the issuance by the CRA of a waiver does not necessarily negate the obligation for the employee to file a Canadian income tax return.
The Economic Action Plan 2015 proposes to provide, as of 2016, an exemption from the withholding requirement discussed above for qualifying non-resident employers in respect of payments made to qualifying non-resident employees who will benefit from the application of a Treaty.
An employee will be a qualifying non-resident employee if the employee is:
- exempt from Canadian income tax in respect of the payment because of a Treaty; and
- not present in Canada (working and holidays) for 90 or more days in any 12-month period that includes the time of the payment.
An employer will be a qualifying non-resident employer if:
- the employer is resident in a Treaty country (or, where the employer is a partnership, at least 90% of the partnership's income for the fiscal period that includes the time of the payment to the employee is allocated to persons that are resident in a Treaty country);
- the employer does not carry on business through a permanent establishment ("PE") in Canada (as defined in the ITA regulations) in its taxation year (or fiscal period) that includes the time of the payment; and
- the employer is certified by the Minister of National Revenue at the time of the payment.
The certification process has yet to be defined by the government. However, it appears that certification will require prescribed information, will be time limited and thus require re-certification, and will be revocable.
Where these conditions are satisfied, the Employer will not be obligated to effect Reg 102 withholding in respect of payments to qualifying non-resident employees. However, the Employer will still be obliged to issue and file T4 reporting slips after the end of the year and the non-resident employees may still be required to file Canadian income tax returns after the end of the year.
Benefits and Observations
The proposal represents a significant step forward for employees who are sent to Canada for extremely short durations. Technically, the Reg 102 withholding obligation applies to an employee sent to Canada for one day, which would "catch" employees travelling to Canada for meetings or projects of short duration. The absence of a de minimis rule has likely resulted in intentional or unintentional non-compliance with Reg 102. Going forward, such visits should be exempted from the Reg 102 withholding, although qualifying non-resident employers will have to track their employees' days of travel to Canada, for business and for pleasure, to ensure the 90-day limit is not surpassed.
As to the 90-day limit, it is not clear why the government chose to impose a 90-day presence restriction in defining an "eligible non-resident employee". Most of Canada's Treaties provide an exemption from tax under the ITA provided that the employee is resident in the Treaty country and the employee is not present in Canada for a period or periods exceeding 183 days in any 12-month period. An otherwise qualifying non-resident employee who is present in Canada for 91 days would continue to satisfy the test for Treaty exemption. Further, where the 90-day limit is surpassed it is not clear whether the requirement to comply with Reg 102 would commence with the 91st day of presence or retroactively to the 1st day of presence but perhaps with a broadened ability to rely on the existing waiver process.
It is also of note that the proposal did not include a blanket exemption for a non-resident employee who is entitled to the de minimis CAD$10,000 exemption found in most Treaties, regardless of whether the employer satisfies the text for a "qualifying non-resident employer".
Whether a non-resident employer will be a qualifying non-resident employer is based in part on whether it carries on business through a PE in Canada. Interestingly, the existence of a PE is to be determined by reference to the ITA regulations rather than the definition contained in Canada's Treaties. The differences between the two definitions may produce anomalous results, including that the employer may not satisfy the test for a "qualifying non-resident employer" (and thus not be relieved of the Reg 102 withholding obligation) even though the employee would be entitled to a full Treaty exemption. It remains to be seen whether the government will modify the proposal to refer to the definition of PE in the applicable Treaty.
It will be interesting to review the information that the government will request from an employer in the certification process. Often when a non-resident sends employees to Canada there is a concern that the employer could be found to be carrying on business in Canada for purposes of the ITA, either under a common law test or under the deeming rule that applies when a non-resident solicits orders or offers anything for sale in Canada through an agent or servant. If found to be carrying on business in Canada, the non-resident becomes obliged to file a Canadian tax return, even if the non-resident does not carry on business through a PE situated in Canada under a relevant Treaty. Accordingly, the certification process may prove to be an early test of whether the CRA agrees with the non-resident employer that it is not carrying on business in Canada. Further, the certification process may occur at a point in time when the non-resident employer believes it will not have a PE in Canada but evolving business conditions cause it to acquire a PE in the future. It is unclear what penalties the non-resident employer might be exposed to.
The proposal also does not provide relief from the reporting requirements. A qualifying non-resident employer will still have to issue T4 reporting slips to each qualifying non-resident employee. One wonders whether the employer certification process could be designed to provide sufficient assurance to the CRA such that the subsequent reporting, of amounts not subject to tax under the ITA, could be eliminated.
Finally, it is important to note that the proposal will not apply to most secondment arrangements involving non-resident employees. A secondment arrangement involves the "lending" of a non-resident employee by a non-resident employer (the "Lending Employer") to a Canadian-resident entity (the "Borrowing Employer") that will employ the non-resident to perform services in Canada for the Borrowing Employer. The Borrowing Employer may be an affiliate of the Lending Employer. The arrangement is principally intended to protect the Lending Employer from being found to be carrying on business in Canada for purposes of the ITA as discussed above. The arrangement also relives the Lending Employer from having to comply with Canadian withholding obligations. In a secondment arrangement, the non-resident employee is typically paid by the Borrowing Employer or it reimburses the Lending Employer. The Borrowing Employer typically assumes the Reg 102 related compliance. Any reimbursement to the Lending Employer will be reduced by the Reg 102 withholding tax remitted to the CRA by the Borrowing Employer. It is important that the reimbursement does not include a "mark-up" in order to avoid the risk that the Lending Employer is viewed as carrying on in Canada the business of providing the services of its employees. In such an arrangement, unless the non-resident employee's total remuneration for the Canadian-situs work does not exceed $10,000 in the calendar year, the employee would not be entitled to a Treaty exemption as a result of the payment arrangements and thus would not be a qualifying non-resident employee.