Beginning June 30, 2014, Canada and the U.S. will implement a new joint initiative to share information with each other about when individuals cross the Canada-U.S. border to enter and leave their respective countries. This initiative will allow both countries to accurately track the whereabouts of Canadian and U.S. persons who cross the Canada-U.S. border for business and/or personal reasons.
Canada imposes withholding tax obligations on non-residents as well as Canadian residents who pay for employment or other services performed in Canada. For example, if a U.S. resident pays salary, wages or other remuneration in a tax year to any employee (of a Canadian or non-Canadian employer) who spends any time in Canada (other than on vacation), the payer is generally required to withhold, remit and report to the Canada Revenue Agency employee source deductions for income tax, Canada Pension Plan and Employment Insurance premiums (known as “Regulation 102 withholding”), unless a waiver is obtained. If the employee is not a Canadian resident, Regulation 102 withholding generally applies only to such remuneration reasonably attributable to the employment performed by the non-resident in Canada. If the employee is a Canadian resident, Regulation 102 withholding applies to all of the employee’s remuneration regardless of where the employee performs the employment. Regulation 102 withholding also applies to directors’ fees paid to a non-resident director of a corporation for director’s duties performed in Canada.
The new cross-border initiative will enable Canada and the U.S. to accurately track the number of days that employees who are residents of one country spend in the other country in a calendar year, which could highlight a Regulation 102 withholding issue for employers as well as a Canadian tax issue for employees. U.S. resident individuals who are employed in Canada in a tax year are required to file an income tax return if they have Canadian tax payable for the year. In some circumstances, the tax treaty exempts remuneration paid to a U.S. resident for employment performed in Canada from Canadian income tax, in which case a Regulation 102 withholding waiver may be available.
A separate Canadian withholding tax obligation applies where a U.S. resident receives a fee (or pays a fee to another non-resident) in respect of services performed in Canada (other than as an employee). In such case, the payer of the fee is required to withhold and remit to the Canada Revenue Agency 15% of the gross amount of the fee and complete required reporting (known as “Regulation 105 withholding”), unless a waiver is obtained. A U.S. resident service provider that does not carry on business in Canada (and therefore is not subject to Canadian income tax) may be able to apply to the Canada Revenue Agency for a waiver of the Regulation 105 withholding requirement.
For example, if a non-resident provides services to Canadians and comes to Canada from time to time to perform these services, the service payments received would be subject to 15% withholding. Where this withholding has not been done in the past, the Canada Revenue Agency may be able to assess the Canadian payer for not withholding since it will soon be able to track the service provider’s movements cross-border. Similarly, if a Canadian entity (for example, a bank, an investment fund company, a manufacturer or a consulting firm) hires non-residents to perform services in Canada and does not withhold and remit with respect to the fees paid for those services, the CRA will soon be able to track the cross-border movements of the non-resident service provider and assess for failing to comply with the Regulation 105 withholding requirement. If you or your business may be affected by the new Canada-U.S. cross-border tracking initiative, you should speak with a tax advisor to understand your tax obligations and options.