Remuneration paid for employment services performed in Canada (even for short-term assignments) by non-resident employees is subject to Canadian income tax withholding, remittance and reporting requirements under subsection 153(1) and regulation 102 (Reg. 102) of the Income Tax Act (Canada) (Act). On April 21, 2015, Finance Minister Joe Oliver tabled the 2015 Federal Budget in the House of Commons, which included a relieving measure for Reg. 102 withholdings (the Proposed Amendments). Although the Proposed Amendments have been welcomed by the tax and business communities as reducing the administrative burden of businesses engaged in cross-border trade, there are concerns that the measures do not go far enough.
The Current Reg. 102 Regime
Under Reg. 102, the remuneration received by non-residents for employment performed in Canada is taxable by Canada, subject to relief under an applicable tax treaty between Canada and the employee’s jurisdiction of residence. For example, an individual resident in the United States who is employed by a non-resident employer generally will be exempt from Canadian tax on remuneration from employment exercised in Canada if the employee is present in Canada for no more than 183 days in any 12-month period commencing or ending in the relevant calendar year and the remuneration is not borne by a permanent establishment in Canada.
Even if relief under a tax treaty is available to exempt the non-resident employee from liability for tax in Canada, resident and non-resident employers alike are generally required to withhold amounts to meet the income tax liability of each employee working in Canada. Additionally, the employer is required to obtain a business number from the Canada Revenue Agency (CRA), issue T4 slips to its employees and file a T4 information return with the CRA. The employee is required to obtain a CRA tax ID number and file a Canadian tax return to obtain a refund of the tax withheld. Currently, certain employers can obtain a waiver from the CRA to be relieved from its obligation to withhold. However, the existing employee waiver system has been criticized as inefficient because each waiver is granted only in respect of a specific employee and for a specific period.
The Proposed Amendments
Under the Proposed Amendments, “qualifying non-resident employers” will be exempt from the Reg. 102 withholding requirement for payments made to “qualifying non-resident employees.” An employer will be a qualifying non-resident employer at a particular time if it satisfies the following requirements:
- If it is not a partnership, it must be resident in a country with which Canada has a tax treaty. In order for an employer that is a partnership to qualify, at least 90% of the partnership’s income or loss for the fiscal period that includes the time of the payment must be allocated to persons that are resident in a treaty country.
- It must not carry on business through a permanent establishment (as defined by regulation) in Canada in the fiscal period that includes the time of the payment.
- It must be certified by the Minister of National Revenue at the time of the payment. For an employer to obtain certification, it must apply to the Minister in prescribed form providing prescribed information. The Minister must be satisfied that the tests noted above are satisfied together with any other conditions that the Minister may establish. Certification may be revoked if the employer does not meet the foregoing conditions.
An employee will be a qualifying non-resident employee in respect of a payment if he or she is resident at the time of the payment in a country with which Canada has a tax treaty, is exempt from tax under Part I of the Act in respect of the payment because of that treaty and is not present in Canada for 90 or more days in any 12-month period in which the payment was received.
Although a qualifying non-resident employer will no longer be required to withhold a portion of the remuneration paid to a qualifying non-resident employee, it will continue to be responsible for the reporting requirements in respect of such payments. Likewise, qualifying non-resident employees will still need to obtain a tax ID number. The ultimate tax liability of the employee will not be affected if the employee is not, in fact, entitled to treaty benefits in respect of the remuneration.
Currently, an employer who fails to withhold amounts as required from payments of salary or wages is subject to a penalty of 10% of the amount that should have been withheld (or 20% if such failure was made knowingly or under circumstances amounting to gross negligence) under subsection 227(8) of the Act. It is possible that an employee could lose the status of a qualifying non-resident employee at the time of a payment as a result of events occurring after the payment, such as failing to satisfy the test requiring a presence of less than 90 days in Canada. However, under the Proposed Amendments, no penalty will be applied if the employer had no reason to believe, at the time of payment, that the employee did not meet the conditions to be a qualifying non-resident employee.
The relieving measure set out in the Proposed Amendments will apply in respect of payments made after 2015.
Although Reg. 102 imposes withholding, remittance and reporting requirements on remuneration paid by either a Canadian-resident or a non-resident employer to any non-resident employee for employment services performed in Canada, only qualifying non-resident employers will be eligible to take advantage of the relieving measure; Canadian-resident employers are not eligible. One rationale behind such exclusion is that, absent a de minimis exception, relief under Canada’s tax treaties is generally not available if the remuneration is paid by an employer resident in Canada or if the remuneration is borne by a permanent establishment of the employer in Canada.
The Joint Committee on Taxation of the Canadian Bar Association and the Chartered Professional Accountants of Canada (Joint Committee) released its submission to the Department of Finance on May 26, 2015, in which it welcomed the Proposed Amendments but raised six points requiring additional clarity and consideration. Each item is briefly described below:
- Definition of “permanent establishment” for purposes of qualifying non-resident employer.The Proposed Amendments require a qualifying non-resident employer not to carry on business through a “permanent establishment (as defined by regulation)” in Canada. The Joint Committee presumed that the definition referred to in the Proposed Amendments is the definition found in regulation 400(2) of the Act for purposes of interprovincial allocation of income when an entity conducts operations in more than one province. However, the term “permanent establishment” is also specifically defined in each of Canada’s tax treaties and may differ from the definition in regulation 400(2). Hence, a non-resident employer may be considered to have a permanent establishment in Canada under the applicable tax treaty, but not under regulation 400(2), entitling such an employer to relief under the Proposed Amendments. Such a result was likely unintended.
- Implications of employee’s surpassing 90 days in Canada. The Proposed Amendments will apply only if the non-resident employee is present in Canada for less than 90 days in any 12-month period in which the Canadian-source remuneration was received. The intended meaning of what constitutes a 12-month period is unclear and requires clarity (does the 12-month period refer to the calendar year, the employer’s fiscal year or a rolling 12-month period?). In addition, clarity is required on whether the current waiver program will be modified to apply to those employees who exceed the 90-day limit under the proposed measure.
- Attestation that employer does not have a permanent establishment in Canada. The specific requirements that an employer must meet to obtain certification by the Minister have not been disclosed. Clarity is required on the expected level of assurance that the employer must attest to and the potential penalties that the employer may face if it later is determined that the employer did in fact have a permanent establishment in Canada.
- De minimis thresholds. Most notably, the Canada-U.S. tax treaty has a de minimis exemption of $10,000 per calendar year. This allows a U.S. resident employee who is entitled to benefits under the treaty to be exempt from tax in Canada on remuneration for employment services performed in Canada under $10,000 regardless of how the costs are accounted for by the employer. No such de minimis thresholds are provided for in the Proposed Amendments, and the Joint Committee recommends that these thresholds be considered.
- Relief for U.S. limited liability companies (LLCs) or other non-treaty eligible entities. U.S. LLCs that are disregarded entities for U.S. tax purposes are not residents for purposes of the treaty. Employees who work for these entities may still be eligible for treaty relief under Article XV of the Canada-U.S. tax treaty because either their Canadian source remuneration for the year is less than $10,000 or they were present in Canada for less than 183 days in a 12-month period and their compensation was not borne by a permanent establishment in Canada. Clarification is required about whether such employers will be eligible for the relieving measures outlined in the Proposed Amendments.
- Reporting requirements. The Joint Submissions note that the Proposed Amendments do nothing to reform the current reporting requirements for non-resident employers conducting operations in Canada and are subject to a significant administrative burden. Some consideration of streamlining the reporting requirements is advisable.
It remains to be seen how the Department of Finance will respond to the issues raised by the Joint Committee, but it is hoped that the Proposed Amendments will go some way to relieve the administrative burdens and business costs associated with Reg. 102 withholdings.