Given increased globalization, many governments and tax authorities are increasing their efforts to enforce compliance rules targeting frequent business travelers. Canada is certainly no exception. Our recent experiences indicate that the Canada Revenue Agency (CRA) has increased its audit activities in this area and has begun enforcing the rules even for short-term business travelers into Canada. In this environment, it is crucial for multinational companies doing business in Canada to have visibility into their employees’ travel and to be aware of the risk and compliance implications of this travel.
Due to the proximity of the US to Canada and the relative ease of travel between the two countries, it is even more important for US companies doing business in Canada to be aware of both the corporate and employee personal tax withholding and reporting obligations for their employees that travel to Canada. This article will provide an overview of the Canadian payroll reporting and withholding obligations for frequent business travelers. We will also review some of the corporate tax implications. These tax rules are complex and the information provided in this article is intended to provide general guidance only. Readers will need to obtain professional tax advice for their specific situations.
One of the first steps in addressing this issue is for companies to be able to track the number of days that their employees spend physically working in Canada. This is often the largest challenge and sometimes creativity is required to accomplish this task. Some companies use the information reported through their timesheet system. Other companies rely on information provided by their travel department or agency. Typically the frequent business traveler may be travelling without even notifying the person responsible for mitigating the compliance risks. Therefore, a process must be developed to identify the frequent business traveler.
When reviewing the payroll withholding and reporting obligations outlined below, it will be surprising to note that there are no minimum thresholds recognized by the CRA for compliance. This means that these obligations exist for even one day of travel for an employee into Canada. Therefore the real challenge in managing the compliance risk is to balance the technical requirements with the practicalities of managing a business. Given the increased scrutiny by the CRA, it is not possible to simply ignore the rules as some organizations did in the past. It is highly recommended that any company that sends employees to work in Canada should review their situation with a global mobility professional to develop a policy meant to address the frequent business traveler.
Canadian Payroll Tax Withholding and Reporting Obligations
An employer is required to withhold and remit Canadian income and payroll taxes (Canada Pension Plan “CPP” and Employment Insurance “EI” Premiums) in respect of its employees performing services in Canada (in accordance with Regulation 102 of the Canadian Income Tax Act (“Act”)). This requirement applies to any employee, regardless of whether they are Canadian residents, or non-residents working temporarily or permanently in Canada. It also applies to any employer including a company that has no presence in Canada.
The employee may be exempt from Canadian income tax under a tax treaty that Canada has with the employee’s home country. They may also be exempt from CPP and EI under a Social Security Totalization agreement that Canada has with the home country, in which case a certificate of coverage should be applied for.
Using the Canada/US Income Tax Treaty as an example, the employee may be exempt from Canadian tax where the Canadian source remuneration is less than C$10,000 or the employee is present in Canada for less than 183 days in any 12 month period (beginning or ending in the tax year) and the remuneration is not paid by or on behalf of a person who is a resident of Canada and is not borne by a permanent establishment (“PE”) in Canada.
Withholding Waiver Application
Even if the employee is exempt from Canadian income tax under a treaty, the employer is still required to withhold income tax unless a withholding tax waiver has been applied for and approved by the CRA in advance. The waiver application should be made 30 days prior to the provision of services in Canada using CRA Form R102-J. This is not always practical or possible and so the employer is faced with having to withhold and remit tax to fully comply with their payroll obligations.
T4 Reporting and Tax Return Filing
Employers are required to prepare and file a T4 Information Return (T4 Slips and Summary Form), reporting all amounts paid to their employees whether or not a waiver of withholding was received from the CRA. The T4 Information Return must be submitted to the CRA by the end of February in the following year. The employee will also be required to file a Canadian income tax return to report the income less the amount exempted under the treaty provisions. The return is due by April 30th of the following year.
The penalty for the failure to withhold is 10% of the amount that should have been withheld. The penalty can increase to 20% in cases where the company continues to be non-compliant. An employer may be held liable for the whole amount of the tax, plus any interest and penalties. The penalty for the failure to issue T4 slips can result in penalties ranging from $100 to $7,500.
Cash Flow Considerations
If all the facts and circumstances would allow a company to obtain the waiver, but they do not do so, the company will be required to meet the payroll tax withholding requirements. In order to re-claim the taxes that have been withheld, the employee must file a Canadian tax return. This withholding requirement creates further complexities including funding the withholding (employer or employee), reclaiming the tax withheld as a refund, and coordinating the tax settlement with the employee.
Social Insurance Number/Individual Tax Number
Employees working in Canada with a valid work permit are required to apply for a Social Insurance Number from Service Canada. In all other cases an Individual Tax Number (“ITN”) can be applied for using CRA Form 1261.
Corporate Tax Considerations
It is important to understand that an employee working physically in Canada for a non-Canadian employer may also create Canadian corporate tax issues for the employer. The rules which are briefly summarized below are fairly complex and it’s important to review their application to any particular situation with a professional advisor.
Where an employee of a non-Canadian employer is performing services in Canada, the employer may be considered to be carrying on business in Canada. This may occur even where the employer has no “presence” in Canada in the form of an office, or a physical location.
Deemed Permanent Establishment
Under the Canada-US Income Tax Treaty, a US corporation may be deemed to have a permanent establishment (“PE”) in Canada where services are provided in Canada for:
- an aggregate of 183 days or more in any twelve-month period beginning or ending in the year
- with respect to the same or connected project for customers who are either residents of Canada or who maintain a permanent establishment in Canada and the services are provided in respect of that permanent establishment.
Under the deemed PE provisions (and the general PE provisions), the activities of the employee may create a permanent establishment for his or her employer. In doing so the employee may not be exempt from Canadian tax under the treaty if his or her remuneration is “borne by a PE (or deemed PE) in Canada”.
Corporate Reporting Requirements
If a company is deemed to be carrying on business in Canada or is deemed to have a PE in Canada, there will be corporate tax reporting requirements and potentially Canadian taxation. Where filing requirements are not met, significant penalties may result even where no tax is owed to Canada.
Regulation 105 Withholding Tax
Payments made by any person to a non-resident in respect of services performed in Canada are subject to a 15% withholding tax under Regulation 105 of the Act. For example, where an employee is working in Canada for a 3rd party, the payment made by that 3rd party to the non-Canadian company is subject to a 15% withholding tax. In certain circumstances the company may request a waiver from the 15% withholding tax requirement.
In general, withholding under Regulation 105 is not required in respect of compensation that is subject to withholding under Regulation 102.
Other Considerations and Opportunity for Voluntary Disclosure
Employees working in Canada on a temporary basis will likely remain on the payroll of their home country. A “shadow” payroll may be set up in Canada to facilitate payroll withholdings and remittances, and reporting obligations.
Voluntary Disclosure Program
There may be opportunities to use the formal Voluntary Disclosure Program (VDP) to avoid some of the potential penalties for past non-compliance with the payroll tax withholding and reporting obligations. These rules allow for relief from penalties and interest of both the company’s and the employee’s non-compliance. There are some conditions that need to be met however, if the voluntary disclosure is accepted, the CRA would waive the penalties and potentially some of the interest associated with the past non-compliance. Individuals should take care to consult with a tax advisor that is experienced in cross-border tax issues when opting to take the VDP route to rectify non-compliance.
If you have any questions please contact Ernie Nagratha at firstname.lastname@example.org (416-214-7833, ext.102).
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.