On January 1, 2024, a new Canada Revenue Agency (“CRA”) administrative policy will take effect to determine an employee's province of employment ("POE") for employer payroll deduction purposes. The updated administrative policy can be found here. This new policy provides, in particular, updated guidance in determining an employee's POE where a full-time remote work arrangement is in place in respect of an employee. In an environment where the traditional office-based employment is evolving, this new policy will aid both Canadian resident and non-resident employers alike in understanding their payroll deduction obligations in Canada.

Remote Work Approach to POE

Ordinarily, the amount of payroll deductions an employer is required to withhold is dependent on the employee’s POE, though the employee’s ultimate tax liability is dependent on their province of residence. A POE for an employee is generally where the employee “reports to work at an establishment of the employer”.[1]

However, when an employee is not required to report for work to the employer’s establishment in person and the remuneration paid to the employee is salary, wages, or commissions, the employee's POE for source deduction and employer contribution purposes is generally the province where the establishment of the employer “from where the employee's salary and wages are paid” is located.[2] In light of past administrative guidance, this will normally be the location of the employer’s payroll department or payroll records, or the establishment that actually bears the expense. For these purposes, and for the purposes of the source deduction rules for income tax, the “employer” is generally considered to be the person paying the salary or remuneration.[3]

We have previously released a review of the tax impact of remote work in Canada with respect to whether an employee's home office creates an "establishment" of the employer here. Basically, an employee's home office will be considered an establishment of the employer if the employee has the authority to conclude contracts on behalf of the corporation from their home office, or if the employee holds and sells an inventory of goods of the employer from their home office. Otherwise, a home office will not ordinarily be considered an establishment of the employer.

Updated CRA Guidance

For employees resident in Canada, the updated guidance provides that an employee is considered to be reporting for work at an establishment of the employer if one of the following applies:

  1. Where a full-time remote work agreement is in place, the employee can reasonably be considered "attached to an establishment of the employer"; or
  2. The employee reports for work physically at the establishment, in which case there is no minimum amount of time the employee has to report to that place.

The new CRA guidance addresses the first test, and provides that it must be determined if a full-time remote work agreement is in place. Generally, the CRA will consider a full-time remote work agreement to exist where the following arrangements are made:

  • The agreement is either temporary or permanent;
  • The employer directs or allows the employee to perform their employment duties remotely on a full-time basis; and
  • The employment duties are performed by the employee at one or more locations that are not an establishment of the employer.

If the above factors indicating a full-time remote work agreement is in place are satisfied, it must then be determined if the employee is reasonably considered to be "attached to an establishment of the employer". The primary indicator in determining this test is whether the employee would, but for the full-time remote work agreement, physically come to work to carry out the functions related to their employment duties at a particular establishment of the employer. A number of secondary indicators may assist in determining whether an employee carries out the functions related to their employment duties at a particular establishment of the employer:

  • The employee would attend in-person meetings, through any type of communication, at that establishment;
  • The employee receives or would receive work-related material or equipment or associated instructions and assistance at that establishment;
  • The employee receives or would receive instructions from their employer regarding their duties, through any type of communication, at that establishment;
  • The employee would be supervised, as indicated in the contractual agreements between the employer and the employee, from that establishment; or
  • The employee would report to that establishment based on the nature of the duties performed by the employee.

Generally, all the above indicators should be reviewed together to determine whether the employee is reasonably considered to be "attached to an establishment of the employer".

As indicated above, since the payroll rules (for income tax purposes) deem the payor of the remuneration to be the “employer”, the employer for payroll purposes may be different than the actual employer at law. As such, there can be circumstances where the factors above will be difficult to apply. The updated CRA policy provides that where an employee works in Canada but does not report for work (never physically and not considered attached under the new CRA administrative policy) at an establishment of the employer, the prior rules will apply (i.e., the POE will be the province or territory where the establishment of the employer from which the employee's salary is paid is located). We also note that the CRA guidance in effect prior to the recent update was based on legislative provisions of the Income Tax Regulations (Canada) and the CRA’s interpretation of the relevant provisions. As of the time of publication, the Income Tax Regulations (Canada) have not been updated to reflect this change in policy.

Non-Resident Employers

The shift towards increasing remote work opportunities has opened up avenues for non-resident employers to employ people located anywhere in the world. However, the ease of remote work may deceive some employers, as the applicable payroll deductions must still be calculated based on the employee's situs of employment in the jurisdiction from which they work. In determining the appropriate payroll deductions, the first issue is to determine whether a non-resident employer has an establishment in Canada. In some circumstances, a non-resident employer may desire to employ remote Canadian employees directly; alternately, the non-resident employer may establish a Canadian subsidiary corporation through which the employees will be employed.

Non-resident Employer, Canadian Establishment

A non-resident employer may wish to employ Canadian resident employees, and may elect to do so by forming a Canadian subsidiary company through which it employs the Canadian employees. In some cases, this subsidiary may take the form of a physical office location with personnel that provide instructions, supplies, and supervision to the remote employees. Where Canadian resident employees operate under a full-time remote work agreement under this scenario, the updated CRA guidance would indicate that the remote employee is reasonably attached to this establishment of the employer.

In other cases, the non-resident employer may only incorporate a subsidiary company in Canada, with no physical establishment connected to it. Where Canadian resident employees operate under a full-time remote work agreement under this scenario, the determination of the employee's POE will revert to whether the subsidiary company operates its payroll department and records through the Canadian subsidiary entity. If so, the province in which the subsidiary corporation was incorporated should operate as the establishment of the employer for purposes of determining the employee's POE.

Non-resident Employer, No Establishment

Where a non-resident employer has no establishment in Canada (including no physical office, and no incorporated Canadian subsidiary) but employs remote Canadian employees, the nature of the employment is considered to be located in Canada, but beyond the taxing limits of any province or territory. In that case, the employer must use the payroll deductions tables for "In Canada Beyond the Limits of Any Province/Territory or Outside Canada", provided here to determine the appropriate employee payroll deductions; these are organized according to the applicable pay period frequency. The employee will then need to reconcile the appropriate provincial income tax and other deductions in the employee's tax return.

Québec Employees

Where the POE is Québec, source deductions and employer contributions for provincial purposes must be made pursuant to the Québec rules and remitted to Revenu Québec. The Québec rules are largely harmonized with the federal rules. However, we note that, as of the date of publication, Revenu Québec has not indicated whether it would harmonize its own administrative position with the newly updated CRA guidance.