Secondment often involves one company (the “Lending Employer”) lending its employees to another related company in another country (the “Receiving Employer”) for the benefit of the Receiving Employer.For example, a United States (“US”) parent corporation could lend one or more of its employees to its Canadian subsidiary.
In such a secondment arrangement, supervision of the seconded employees is the responsibility of the Receiving Employer.However, the employees usually remain on the Lending Employer’s payroll, with the Lending Employer paying the employees their wages net of any home and host country taxes and other amounts required to be withheld and remitted (“payroll taxes”).The Receiving Employer reimburses the Lending Employer its payroll costs net of any payroll taxes the Receiving Employer is required to withhold and remit under the laws of the host country.
Typically, the Receiving Employer remits payroll taxes required to be withheld and remitted by the host country.The Lending Employer remits payroll taxes required to be withheld and remitted by the employees’ home country.
Why Use Secondment?
The main tax benefit of secondment is that, when structured properly, it enables a non-resident Lending Employer to avoid Canada’s jurisdiction to tax, while still enabling the Lending Employer to lend employees to a Canadian Receiving Employer.
Under the Income Tax Act, Canada has the jurisdiction to tax the profits earned by a non-resident from carrying on a business in Canada.Tax treaties restrict this jurisdiction to tax to profits attributed to a “permanent establishment” in Canada.For this restriction to apply, the non-resident must be a resident of a country that has entered into a tax treaty with Canada and must be qualified for benefits under that treaty.For example, under the Canada-US Tax Convention, a US resident carrying on a business in Canada will not be taxable in Canada on its Canadian-source business profits unless the US resident has a permanent establishment in Canada (assuming limitation on benefits rules do not deny the treaty benefit).
Secondment is used to prevent a non-resident Lending Employer from being found to carry on a business in Canada or have a permanent establishment in Canada.Since the Receiving Employer is considered to be the employer under a properly structured secondment arrangement, the seconded employees cannot be used to show the Lending Employer is carrying on a business in Canada or has a permanent establishment in Canada.Note, the seconded employees must actually be doing the Receiving Employer’s work as an employee and should not be performing work on behalf of the Lending Employer while on secondment.
Another tax benefit of secondment is that, when structured properly, it prevents certain withholding and goods and services (“GST”) and harmonized sales tax (“HST”) requirements from applying to the reimbursements of payroll taxes paid by the Receiving Employer.These topics are discussed below
What Type of Withholding Obligations Does Secondment Raise?
Section 105 of the Income Tax Regulations requires every person paying to a non-resident an amount in respect of services rendered in Canada to withhold 15% of such payment.The reimbursement paid to the Lending Employer by the Receiving Employer could trigger the 15% withholding tax, and the Receiving Employer would have to withhold and remit 15% of the reimbursement.
However, the Canada Revenue Agency’s administrative position is that section 105 will not apply to a secondment provided the following conditions are met.First, the arrangement must be a valid secondment.The Canada Revenue Agency has stated requirements to which a secondment must conform in order to be considered valid.Second, the Lending Employer must generally lend the employees at cost.
Section 102 of the Income Tax Regulations requires both resident and non-resident employers to withhold and remit Canadian payroll taxes from amounts paid to non-resident employees for work done in Canada.In the context of secondment, the Lending Employer, Receiving Employer, or both may be required to make the section 102 withholding and remittance.Penalties and interest will be assessed on a failure to comply.Normally, it is the Receiving Employer who makes the remittance to the Canada Revenue Agency.
Section 102 will only apply if payroll taxes are required to be withheld from the non-resident employees’ earnings.The relevant payroll taxes are Canadian income tax, Canada Pension Plan (“CPP”) contributions, and Employment Insurance (“EI”) premiums.In the context of secondment, there are various exemptions that may exempt the non-resident employees’ income from payroll taxes.
Canadian Income Tax
The Income Tax Act imposes tax on the taxable income of a non-resident person who was employed in Canada at any time in the year or a previous year (determined under special rules for non-resident persons).Tax treaties place restrictions on Canada’s ability to impose Canadian income tax on non-residents.For example, article XV(2) of the Canada-US Tax Convention provides that employment income of a US resident from an employment in Canada will not be taxable in Canada if the remuneration does not exceed CDN $10,000 in the calendar year.To take advantage of this provision, the US resident must apply for and receive an R102-R or R102-J waiver.Such waivers must be obtained in advance and are issued at the discretion of the Canada Revenue Agency.
Under the above example, the US resident will be required to file a Canadian income tax return to recover any tax overpaid if he or she is entitled to an exemption under the Canada-US Tax Convention, but a waiver is not obtained.A US resident seconded to a Canadian Receiving Employer will also be required to file a Canadian income tax return if he or she has tax payable for the calendar year.The return is due by April 30 of the following year.
Where a seconded employee is subject to Canadian income tax on his or her employment income earned in Canada and is not able to access a tax treaty exemption from Canadian income tax, the employee may be entitled to receive foreign tax credits in his or her home country.Foreign tax credits are used to avoid double taxation of the same income, i.e., Canadian taxation on the income and then home country taxation on the same income.
“Social security totalization agreements” restrict Canada’s ability to require CPP contributions from the Canadian-source employment income of non-residents.For example, the Agreement between the Government of Canada and the Government of the United States of America with Respect to Social Security exempts US residents from having to make CPP contributions on Canadian-source employment income in certain circumstances.The US resident must be covered under the US equivalent of CPP in respect of work performed for a US employer who has a place of business in the US, and the US resident must be required by the US employer to work in Canada.Also, the period of work in Canada cannot exceed 60 months.
A US resident who qualifies under the above rule must apply for a Certificate of Coverage from the US Social Security Administration in order to access the exemption.
Canadian-source employment income of a non-resident is not subject to EI deductions if the non-resident’s home country requires someone to pay unemployment insurance premiums on that income.For example, a US resident seconded to Canada will generally not have to pay EI premiums provided someone is required to pay US unemployment insurance premiums on the Canadian-source employment income.
Are the Reimbursements Subject to GST/HST?
In general, a supply of services in Canada is subject to a 5% GST or a varying rate of HST in participating provinces.The GST/HST could apply to the reimbursement for the use of the seconded employees paid by the Canadian Receiving Employer to the Lending Employer.
However, the Canada Revenue Agency’s administrative position is that GST/HST will not be payable on the reimbursement provided the Receiving Employer is considered the employer of the seconded employees.This is based on the exemption from GST/HST for supplies of services to an employer by an employee.Provided the Receiving Employer exercises control and supervision over the seconded employees, there should be no GST/HST payable on the reimbursement for the use of the employees.The reimbursement amount should generally be at cost.
Caution Regarding Reimbursements for Administrative Overhead Charges
The Canada Revenue Agency has an administrative position regarding payment to a Lending Employer of up to $250 per employee per month for overhead costs related to a secondment.The Canada Revenue Agency’s administrative position is that such an administrative overhead charge will not cause the reimbursement (including the administrative overhead charge) paid by the Receiving Employer to be subject to 15% withholding tax under section 105 of the Income Tax Regulations.
However, there appears to be no guidance from the Canada Revenue Agency on whether such an administrative overhead charge would make GST/HST payable on a reimbursement.It is possible that the payment of an administrative overhead charge could cause a reimbursement paid by the Receiving Employer to be subject to GST/HST as a taxable supply of a service.In other words, the entire reimbursement composed of salary, benefits, and an administrative overhead charge could be subject to GST/HST as a supply of a taxable service.
Guidance on this issue should be sought from the Canada Revenue Agency prior to an administrative overhead charge being charged by a Lending Employer to a Receiving Employer.