The Canada Revenue Agency (“CRA”) recently introduced a program to ease the administrative burden associated with Canadian withholding on the salary, wages, or other remuneration paid to non-resident employees performing their duties in Canada for a short period of time. These measures aim to remove certain ‘qualifying non-resident employers’ and ‘qualifying non-resident employees’ from the withholding requirements imposed under subsection 153(1) of the Income Tax Act (Canada) (the “Tax Act”). Furthermore, these measures will alleviate the need for qualifying non-resident employees to apply for waivers from withholding (commonly known as regulation 102 waivers).
THE EXISTING EMPLOYEE WITHHOLDING REGIME AND NON-RESIDENTS OF CANADA
The Tax Act imposes employee withholding on non-residents to the extent they perform any employment duties in Canada regardless of whether these non-resident employees will ever have an ultimate tax liability under the Tax Act (for instance where an income tax treaty applies). The Tax Act also imposes penalties for failure to withhold amounts required even where no tax would ultimately be payable. Amounts which are withheld and remitted can only be recovered by the employee if they file a Canadian income tax return.
To deal with such situations where a treaty applies, the CRA allows for employees resident in a country with which Canada has a tax treaty to apply for a regulation 102 waiver which can be presented to the employer in order to waive the withholding requirements. However, the process for obtaining a regulation 102 waiver requires at least thirty days of lead time and is time consuming to complete, making the application impractical in many situations. Moreover, the CRA has imposed its own administrative policies over and above the requirements set out in most treaties, making regulation 102 waivers costly and burdensome to obtain.
THE NEW EXEMPTION
Recognizing that the existing system was impractical for many business travelers, an additional program was announced, allowing “qualifying nonresident employers” to forego Canadian tax withholding on amounts paid to “qualifying non-resident employees”.
A ‘qualifying non-resident employee’ is defined in the Proposed Amendments to mean an employee who (a) is, at that time, resident in a country with which Canada has a tax treaty, (b) not liable to tax under Part I of the Tax Act in respect of the payment because of that treaty, and (c) works in Canada for less than 45 days in the calendar year that includes that time or is present in Canada for less than 90 days in any 12–month period that includes that time.
A ‘qualifying non-resident employer’ is defined in the Proposed Amendments to mean an employer whom, (a) is resident in a country with which Canada has a tax treaty, (b) does not, in the relevant year, carry on business through a permanent establishment in Canada, and (c) is certified by the CRA by making an application in the prescribed form at least 30 days prior to the employee performing the services in Canada.
Because of this arbitrary restriction set out in the Proposed Amendments, there could still be a large number of business travelers who will either be required to apply for a regulation 102 waiver, or be subject to withholding tax and be required to file a return to obtain a refund of the tax pursuant to protections under one of Canada’s tax treaties.
RECORD KEEPING AND REPORTING FOR QUALIFYING NON-RESIDENT EMPLOYERS
It should be noted that even though this process removes the employer from the withholding and remitting requirements for qualifying non-resident employees, certain reporting obligations remain. Qualifying nonresident employers will be required to:
- determine whether the employees are resident in a country with which Canada has a tax treaty,
- track and record the number of days each employee is either working in Canada or is present in Canada and the income attributable to these days,
- complete and file the applicable Canadian income tax returns for the calendar years under certification, and
- prepare and file a T4 Summary and Information Return for the employees that are not excluded by proposed subsection 200(1.1) of the Regulations.
Proposed subsection 200(1.1) of the Regulations exempts T4 reporting for amounts that qualify under these new exemptions if the employer, after reasonable inquiry, has no reason to believe that the employee’s total amount of taxable income earned in Canada under Part I of the Act during the calendar year is more than $10,000.
WHAT THIS MEANS FOR NON-CANADIAN BUSINESSES
While these new exemptions do not cover every type of business traveler to Canada, they are very helpful for employers that periodically send employees to Canada for short periods of time. This is especially true in circumstances where business trips are unplanned or occur in a manner that does not allow sufficient time to obtain a regulation 102 waiver. For these non-resident employers, it will certainly be easier to comply with this new program, rather than rushing employees to obtain a regulation 102 waiver or withholding and remitting tax on the employees’ behalf. Once in the program, qualifying non-resident employers should continue to monitor employee travel and require employees that will be working in Canada for more than 45 days or present in Canada for more than 90 days to apply for regulation 102 waivers to ensure no withholding will be required.
(A modified version of this article originally appeared in CCH Tax Topics, number 2289, January 21, 2016).