Beginning June 30, 2014, Canada and the U.S. will implement a
new joint initiative to share information with each other about
when individuals cross the Canada-U.S. border to enter and leave
their respective countries. This initiative will allow both
countries to accurately track the whereabouts of Canadian and U.S.
persons who cross the Canada-U.S. border for business and/or
Canada imposes withholding tax obligations on non-residents as
well as Canadian residents who pay for employment or other services
performed in Canada. For example, if a U.S. resident pays salary,
wages or other remuneration in a tax year to any employee (of a
Canadian or non-Canadian employer) who spends any time in Canada
(other than on vacation), the payer is generally required to
withhold, remit and report to the Canada Revenue Agency employee
source deductions for income tax, Canada Pension Plan and
Employment Insurance premiums (known as "Regulation 102
withholding"), unless a waiver is obtained. If the employee is
not a Canadian resident, Regulation 102 withholding generally
applies only to such remuneration reasonably attributable to the
employment performed by the non-resident in Canada. If the employee
is a Canadian resident, Regulation 102 withholding applies to all
of the employee's remuneration regardless of where the employee
performs the employment. Regulation 102 withholding also applies to
directors' fees paid to a non-resident director of a
corporation for director's duties performed in Canada.
The new cross-border initiative will enable Canada and the U.S.
to accurately track the number of days that employees who are
residents of one country spend in the other country in a calendar
year, which could highlight a Regulation 102 withholding issue for
employers as well as a Canadian tax issue for employees. U.S.
resident individuals who are employed in Canada in a tax year are
required to file an income tax return if they have Canadian tax
payable for the year. In some circumstances, the tax treaty exempts
remuneration paid to a U.S. resident for employment performed in
Canada from Canadian income tax, in which case a Regulation 102
withholding waiver may be available.
A separate Canadian withholding tax obligation applies where a
U.S. resident receives a fee (or pays a fee to another
non-resident) in respect of services performed in Canada (other
than as an employee). In such case, the payer of the fee is
required to withhold and remit to the Canada Revenue Agency 15% of
the gross amount of the fee and complete required reporting (known
as "Regulation 105 withholding"), unless a waiver is
obtained. A U.S. resident service provider that does not carry on
business in Canada (and therefore is not subject to Canadian income
tax) may be able to apply to the Canada Revenue Agency for a waiver
of the Regulation 105 withholding requirement.
For example, if a non-resident provides services to Canadians
and comes to Canada from time to time to perform these services,
the service payments received would be subject to 15% withholding.
Where this withholding has not been done in the past, the Canada
Revenue Agency may be able to assess the Canadian payer for not
withholding since it will soon be able to track the service
provider's movements cross-border. Similarly, if a Canadian
entity (for example, a bank, an investment fund company, a
manufacturer or a consulting firm) hires non-residents to perform
services in Canada and does not withhold and remit with respect to
the fees paid for those services, the CRA will soon be able to
track the cross-border movements of the non-resident service
provider and assess for failing to comply with the Regulation 105
withholding requirement. If you or your business may be affected by
the new Canada-U.S. cross-border tracking initiative, you should
speak with a tax advisor to understand your tax obligations and
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