As we move forward from the confusion and disruption that 2020 brought, companies are looking ahead, somewhat hesitantly, to what 2021 has in store. With news of the vaccine, businesses in some countries may be better positioned to return to a pre-pandemic global mobility business model, while others may be delayed or, in some cases, may never come back. Regardless of the level of optimism, there still exists a great deal of uncertainty at all levels of government and the populace as to when we return to a pre-COVID environment.
From a Canadian perspective, the pandemic has forced companies and their employees to pivot and quickly adapt to address employee safety and restrictions on travel. Like the US and other countries, working from home or working anywhere has become common, requiring changes to traditional mobility. These mobility changes have created additional tax complexities that have required new guidance from the Canada Revenue Agency (CRA). This article highlights key areas of consideration for Canadian companies as they continue to evolve their mobility programs and provides an overview of the initial pandemic-related guidance from the CRA.
How Canadian companies are working through the pandemic
As borders and workplaces closed last spring, Canadian companies were forced to quickly cope with new challenges resulting from employees who needed to work from their “Home” location. In many cases, this new flexibility in work location required mobility departments to scramble to accommodate the needs of the employee and business, while also highlighting the lack of defined “work anywhere” polices.
As the pandemic has continued, employees’ attitudes toward working remotely have been increasingly changing from a temporary to a permanent basis. As a result, companies must now begin to revisit the ad-hoc policy approach that was initially required last spring, to build more rigorous policies that better balance employee needs and company costs and risks.
This need for appropriate policies and supporting processes is especially critical when employees are working across borders. To highlight these special challenges, we provide some examples of common scenarios for employees either stuck in Canada or forced to return to Canada because of the pandemic, including the tax issues and needed employer support. These examples provide interesting insights into how companies, both large and small, are making attempts to work through the pandemic.
Employees stuck in a location outside of Canada
In general, Canadian tax residents are subject to income tax on worldwide income, while non-residents are subject to income tax on Canada source income only (e.g., for employment income, the “source” is typically determined based on the taxpayer’s physical location during their workday). As such, the determination of an individual’s tax residency position is critical. From a Canadian perspective, a person is generally considered a resident of Canada if they have established significant personal ties to Canada—important factors here include duration of stay, location of family, housing arrangements, and the nature of their personal, economic, and social ties.
Due to the pandemic, many Canadian residents have questioned how unanticipated time spent outside of Canada will impact their residency position. From a Canadian perspective, the determination of tax residency continues to be based on an individual’s particular facts and circumstances (i.e., residential ties). This manner of determining Canadian tax residency will not necessarily change due to pandemic-related restrictions. However, it will be important for employers to understand where their employees are located, what job duties are being performed, and the impact a prolonged stay will have for immigration and tax purposes in the Host location.
Some questions employers should consider:
- Will the unanticipated time in the Host location result in tax residency under Host location rules and is there an income tax treaty or COVID-19 related exceptions that can address potential double taxation?
- If a social security agreement applies between Canada and the Host location, will a certificate of coverage now be required to maintain Canadian coverage, or an extension requested for an existing certificate?
- Will the company need to report and withhold income and/or social tax in the Host location if domestic or treaty exceptions are no longer available?
- Will the employee now be subject to income tax filing requirements in more than one location and what support will be provided to help them manage the extra costs and complexities?
In situations where an employee is stuck outside of Canada in another country, we have found that companies are providing different degrees of support to their employees. Support being offered to short-term travelers varies from simply offering extended health coverage in the foreign jurisdiction, to reviewing each employee based on the merits of their own individual situation, or in some cases, the employer not providing any additional support. Most interestingly is that some companies are either considering or approving levels of support typically seen with a full expatriate assignment. These items often include immigration support and tax compliance services, along with other benefits provided to those on assignment.
This wide range of approaches demonstrates that establishing a streamlined and tactical company plan should be considered to ensure a level of care and consideration for employees who are in a situation beyond their control. If companies are considering additional benefits for employees, consideration and determination should be made on the taxability of these benefits in the Host country as well as the valuation of each benefit. It appears that regardless of the pandemic, Canada has not altered their interpretation of the taxation of benefits received in capacity of employment.
Employees whose foreign assignment was terminated due to the pandemic
Another commonly seen situation relates to companies who have had to pull their employees back to Canada due to the pandemic. Depending on where and how the foreign assignment was arranged, several situations can arise which will require a prompt response to mitigate taxes both in Canada and in the foreign jurisdiction.
For example, it is possible that the employee may have severed their residential ties with Canada at the time of taking the foreign assignment. With the foreign assignment being terminated, the return date to Canada and the possible establishment of tax residency in the foreign jurisdiction may create unintended tax consequences and complexity for the employee, especially if the assignment occurred in a country that does not have an income tax treaty with Canada. Although the employee may be able to claim foreign tax credits to alleviate some of the tax, there exists the possibility of true double taxation for the employee, including the need to consider the unwinding of any deemed dispositions (certain property is subject to taxation on accrued gains/losses at the time an individual ceases Canadian tax residency, even if the property is not actually sold). What if the assignment is terminated within the same year of the relocation? The company will have to decide how best to support employees in that situation.
Employees who remain a tax resident of Canada when directly hired by a foreign company
Another important situation is where an individual has accepted an opportunity outside of Canada with a new foreign company, but the individual remains a tax resident of Canada. Since the employee remains a tax resident of Canada, the foreign company is required to withhold and remit Canadian withholding tax. The foreign company may not be aware of the employee’s ongoing residency status and often is not informed of their Canadian payroll compliance requirements.
If the foreign company is aware of their Canadian payroll requirements, the employee may file a request for a tax reduction waiver based on undue hardship. The undue hardship would make the foreign employment income subject to both Canadian and foreign withholding taxes. If the tax reduction waiver is approved, the CRA will grant a letter of authority. The letter of authority would allow the foreign employer to reduce the amount of required Canadian withholding taxes.
Where the employee remained in Canada due to the travel restrictions related to the pandemic, the guidance issued by the CRA is somewhat vague on whether an assessment of the failure to withhold penalties would be applicable to the foreign company. The CRA does state that where the employment duties were of an exceptional and temporary basis and where a letter of authority had previously been issued, then the CRA would allow a continuance on the letter of authority.
If the foreign country employer failed to abide by the Canadian tax withholding rules, it is probable that they could be subject to the failure to withhold penalty. As for the employee, it is possible they could have an unforeseen balance owing when filing their Canadian income tax return due to the foreign company’s failure to withhold any Canadian income taxes.
Due to the potential complexities and risks, it is important to consult with a mobility tax firm who specializes in these types of unique cross-border scenarios.
Canada Revenue Agency initial guidance for business travel and taxation
As reflected above, there have been many instances where foreign employees have either been stuck in Canada or have decided to return home to Canada. To address these and other international tax situations, the CRA released initial guidance in May 2020, and continued to provide updates on these original positions. We assume the guidance written will be the position accepted by the CRA. It will be interesting to note where the CRA will stand when a taxpayer is under an audit review for a position that was taken under this guidance. Although we cannot address every issue or situation that CRA addressed, we will reference the commentary related to foreign business travel and taxation.
Impact of the pandemic on tax residency and the “183-day” rule
A concern that often comes up is that companies want to restrict the length of stay that an employee has in a foreign jurisdiction by observing 183-days as the limit. The reasoning is that crossing that number of days could establish tax residency in the foreign jurisdiction. In addition, if that 183-day threshold is exceeded, it is possible that the employee may no longer be protected by a tax treaty, should one be present.
As noted previously, the determination of an individual’s Canadian tax residency is based on their particular facts and circumstances (i.e., residential ties). This position has not changed during the pandemic; however, the CRA has indicated that where an individual stayed in Canada only because of “travel restrictions,” that factor alone will not create tax residency in Canada. To clarify the position, the CRA will not look at those days where the individual remains a tax resident in another country and has the intention to return to that country as soon as possible.
It is understood that during the pandemic travel has been restricted by many countries including Canada. In most cases, the CRA will look at travel restrictions on a case-by-case basis. On October 15, 2020, the CRA clarified that, in the determination of tax residency, the CRA will generally view the Canadian government’s recommendation to Canadians to return to Canada as a “travel restriction.”
Therefore, absent of establishing significant residential ties with Canada, temporary foreign employees, stuck in Canada, should not trigger tax residency. But what about employees being present in Canada beyond a 183-day period, therefore, no longer qualifying for protection from taxation under an income tax treaty (typically under Article XV of the Canada-Foreign Country treaty)?
The CRA has also provided guidance that when foreign employees are performing their duties in Canada, solely due to the travel restrictions, those days (from March 15 and ending September 30) in Canada will not be counted towards the 183-day test as a requirement to qualify under Article XV of the treaty. Consequently, where the other related tests are met under Article XV, the foreign employee would not be taxable in Canada. The determination of Canadian payroll reporting for non-resident employees remains as is, but exceptions do exist with the impact of the travel restrictions. As you can see, it can get quite complicated.
Suffice to say that companies, their employees, and government tax authorities have had to adapt rather quickly to the impact of COVID-19, and the CRA has recognized this and provided guidance on such matters for companies. Other countries have likely also issued similar guidance and companies should speak with their tax advisors on the possible tax impacts to the company and their employees. It goes without saying that a review of one’s policy regarding temporary business travel should be a consideration, given the spotlight the pandemic has uncovered.
Schedule a call with our team to talk through your specific situation and ask any additional questions you may have.
Author: Randall Timm
Randall serves as a Director in GTN’s Canadian office where he leads GTN’s Canadian services, supporting clients with mobile employee populations throughout Canada. Randall has over 25 years of experience assisting multi-national companies with their globally mobile workforces, as well as assisting athletes and entertainers with their international tax affairs. His experience includes both Canadian and US income tax compliance, payroll, social tax, compensation, and tax policy consulting. His vast experience and understanding of the complexities of mobility tax allows him to provide valuable insights and develop solutions that fit client needs. +1.343.804.4292 | firstname.lastname@example.org