Before you send an employee off on a new assignment in Canada, there are a few things they could probably use: a warm parka, an introductory guide to ice hockey, and a thorough understanding of Canadian tax law.
For employees working in any country, understanding the tax system is crucial to avoiding unnecessary risks and costs. When it comes to Canada, this starts with determining whether your mobile employee will be considered a Canadian resident or be considered a non-resident business traveler.
Determining Canadian Residency
Any non-resident who is in-country for 183 days or longer during a calendar year is considered a tax resident in Canada. However, if that employee’s Home country has an applicable income tax treaty with Canada, they may be able to retain their non-resident status, which may lead to a lower tax burden or make filing taxes simpler for them.
Canada does have income tax treaties with many countries, including the US. In general, these treaties would provide an exemption from Canadian income tax if defined criteria are met by both the employer and business traveler. The following are typical of the types of requirements that would need to be met to achieve the Canadian income tax exemption for the employee:
- The company does not deduct the related compensation expense for the employee on their Canadian corporate tax return
- The employee does not exceed the specified limit for the traveler’s physical presence in Canada as set by the treaty
- The employee’s Canadian related compensation does not exceed certain income thresholds
If the criteria aren’t met or there is no treaty in effect, Canadian residency is likely because qualification as a resident includes establishing significant personal ties in-country—for example, moving to Canada with their family—or having a home in Canada.
However, even if your employee is exempt from Canadian income taxes under a treaty, you may still have corporate reporting requirements to meet. In addition, there may be applications that need to be filed to obtain a waiver from having to withhold Canadian taxes from your employees’ paychecks.
Who Taxes What in Canada
Canada has several levels of taxation: municipal, provincial, and federal. However, with the exception of Quebec, the Canadian Revenue Agency (CRA) administers the provinces and territories' personal tax systems (income and sales taxes), simplifying the payment system.
Canadian residents are subject to income taxes on their worldwide income. The scale is graduated—rising with the amount of personal income earned—from 19-54% of total earnings. Because the tax rate imposed by each province or territory is different, the area where the employee works and lives will determine the income tax rate the CRA assesses.
Unlike countries such as the US, where married taxpayers have the option of filing and paying their taxes jointly, in Canada, spouses are required to file separate returns. Because of this, before arriving in Canada, employees that will be considered residents may want to shift assets producing investment income into the lower-earning spouse’s name.
Other Tax Considerations
Canada has social security agreements with more than 50 countries, including the US. These agreements exempt expatriates on temporary assignments (typically up to five years) and their employers from contributing all or a portion of the Canadian social taxes that would typically be due. For travelers to Canada, no application is required with the CRA to receive this exemption. However, the employer may need to obtain a Certificate of Coverage from the Home country social tax authorities to support ongoing participation in the Home country social security system.
Canadian Social Taxes for 2019:
- Canadian Pension Plan: 5.1% of salary for both employers and employees, up to C$2,749 each. Rates differ for Quebec.
- Employment Insurance (EI): For employees, premiums are calculated at 1.62% of employee earnings, up to a maximum contribution of C$860.22. For employers, premiums are calculated at 1.4 times the amount of the employee’s premium, up to a maximum contribution of C$1,204.31 per employee. Rates differ for Quebec.
Five Tips for Minimizing an Employee’s Canadian Tax Bill
Mobile employees leaving for an assignment in Canada do have some opportunities to minimize their Canadian tax liabilities while there. Here are some of the most popular options they’ll want to consider:
- Carefully timing a transfer to Canada may help reduce the employee’s Canadian tax liability, given that residency and taxes are incurred on a calendar basis. If a tax treaty is involved, it should be consulted to see at what point in the year the move would be most advantageous.
- Accelerating or deferring income to non-resident periods may reduce the employee’s tax burden. Receiving payment for services before leaving for Canada or delaying payments until returning from an international assignment can impact taxes.
- Capital gains may be subject to taxation at special tax rates or might not be subject to tax at all. Assets that the employee is considering selling should be evaluated to determine whether it’s more beneficial to sell before leaving for Canada or after arriving there.
- Subject to specific requirements, reasonable education allowances for children may be exempt from Canadian taxation, which may impact your employee’s choice of schools for their children.
- Certain allowances and reimbursements may be fully or partially excluded from taxable income, including items such as duplicate housing costs for up to two years, moving expense reimbursements, and limited furniture allowances. Knowing the impact of each will help your mobile employee make more informed selections when moving.
For a personalized assessment of the tax liabilities and reporting requirements you and your mobile employees will encounter during a Canadian assignment, please contact us. As mobility tax specialists, we can help you understand the rules and answer any questions you may have.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.