Canada: International Tax Measures

Income Tax Withholding Requirements for Non-Resident Employers

Current Withholding Income Tax Requirements for Non-Resident Employers

Canada generally taxes the employment income of non-residents earned in Canada. However, an employee who is a resident of a country that has a tax treaty with Canada may be exempt from Canadian tax on employment income from a non-resident employer if certain conditions are met.

For example, a U.S.-resident employee will generally be exempt from Canadian taxation under the Canada-US Tax Treaty in respect of remuneration from employment in Canada if such remuneration does not exceed $10,000 (Canadian Dollars), or the employee is present in Canada for a period or periods not exceeding, in the aggregate, 183 days in any 12-month period commencing or ending in the fiscal year concerned and the remuneration is not paid by, or on behalf of, a person who is a resident of or has a permanent establishment in Canada. 

An employer (including a non-resident employer) is generally required to withhold and remit to the Canada Revenue Agency (the "CRA") amounts on account of the income tax liability of an employee working in Canada, even if the employee is a non-resident who is expected to be exempt from Canadian tax because of a tax treaty.

Current Regulation 102 Waiver Regime

Under the current regime, it may be possible for a non-resident employee or his or her employer, on the employee's behalf, to obtain an employee-specific waiver (generally referred to as "Regulation 102 Waiver") from the CRA in order to be relieved from the obligation to withhold.  The current waiver regime has been criticized as inefficient, because each waiver may be granted only in respect of a specific employee and for a specific time period.

Proposed Amendments to Requirement to Withhold Income Taxes by Non-Resident Employers

In order to reduce the administrative burden of businesses engaged in cross-border trade and commerce, the Budget proposes to provide an exception to the withholding requirements for payments by "qualifying non-resident employers" to "qualifying non-resident employees".

The Budget defines a "qualifying non-resident employee" as an employee who:

  • is, at that time, resident in a country with which Canada has a tax treaty;
  • is not liable to tax under Part I of the Income Tax Act (Canada) (the "Tax Act") in respect of such payment because of that treaty; and
  • is not present in Canada for 90 or more days in any 12-month period that includes the time of the payment.

An employer (other than a partnership) will be a "qualifying non-resident employer" at any time if:

  • it is, at that time, resident in a country with which Canada has a tax treaty;
  • it does not, in its taxation year or fiscal period that includes the particular time, carry on business through a permanent establishment in Canada; and
  • it is certified by the Minister of National Revenue at the time of the payment.

An employer that is a partnership will be considered a "qualifying non-resident employer" if it meets the second and third conditions applicable to an employer described above and not less than 90% of the income or loss of the particular partnership, for the fiscal period that includes the time of the payment, is allocated to members resident in a country with which Canada has a tax treaty.   Where the income or loss of the partnership is nil for the period, the income of the partnership for the period will be deemed to be $1,000,000 for the purpose of determining a member's share of the partnership's income.

Certification may be issued upon the employer's application to the Minister of National Revenue in prescribed form.  Certification may be denied or revoked if the employer fails to meet or maintain the conditions described above or to comply with its Canadian tax obligations.

The Budget proposals do not impact an employer's reporting obligations under the Tax Act.

The employer's certification will not affect the non-resident employee's Canadian tax liability.  Employers will continue to be liable for any withholding and remitting in respect of non-resident employees found not to have met the conditions set out above.

However, no penalty will apply to a "qualifying non-resident employer" for failing to withhold in respect of a payment if, after reasonable inquiry, the employer had no reason to believe, at the time of payment, that the employee did not meet the "qualifying non-resident employee" conditions set out above.

This measure will apply in respect of payments made after 2015.

Streamlining Reporting Requirements for Foreign Assets (Form T1135)

Currently, taxpayers who own "specified foreign property" with a total cost of more than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. Specified foreign property may include shares of non-resident corporations, interests in non-resident trusts that are acquired for consideration, debt owed by non-residents, funds or intangible property held outside of Canada, and tangible personal property situated outside of Canada.

The CRA introduced a revised Form T1135 in 2013 that required a significant increase in the amount of information disclosed by taxpayers.  The increased disclosure requirements have created a compliance burden for some taxpayers.  It appears the Federal Government has decided to reduce the compliance burden on taxpayers who hold a relatively small amount of specified foreign property.  Under a revised form currently under development, a taxpayer will be able to use a new simplified foreign asset reporting system provided the total cost of the taxpayer's specified foreign property is less than $250,000 throughout the year.  In all other cases, the current reporting requirements will continue to apply.

Captive Insurance

The Tax Act treats foreign accrual property income ("FAPI") earned from a controlled foreign affiliate of a taxpayer resident in Canada as taxable in the hands of the Canadian taxpayer on an accrual basis, whether or not actually distributed back to Canada.

Under the current provisions of the Tax Act, income of a foreign affiliate ("FA") from the insurance of risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada (defined in the Budget as "Specified Canadian Risks") is FAPI, unless certain conditions are met. This specific anti-avoidance rule was amended in 2014 to curtail certain tax-planning arrangements known as "insurance swaps". These arrangements were designed to circumvent the existing anti-avoidance rule while allowing the affiliate to retain its economic exposure to a pool of Canadian risks.

The Federal Government is proposing to modify this anti-avoidance rule further as it has become aware of alternate arrangements that are intended to achieve tax benefits similar to those that the 2014 amendment was intended to thwart. In the alternate arrangements, the affiliate receives consideration with an embedded profit component (based upon the expected return on the pool of Canadian risks) in exchange for ceding its Specified Canadian Risks.

The Federal Government is of the view that the 2014 amendment may not apply to these alternative arrangements if the affiliate does not enter into an insurance swap transaction that provides it with economic exposure to the Specified Canadian Risks. Therefore, specific legislative action is proposed to clarify that these arrangements give rise to FAPI.

Budget 2015 proposes to broaden the existing anti-avoidance rule in the FAPI regime to ensure that profits of a Canadian taxpayer from the ceding of Specified Canadian Risks remain taxable in Canada. More particularly, it will be amended so that:

  • a FA's income from services in respect of the ceding of Specified Canadian Risks is included in computing the affiliate's FAPI; and
  • for these purposes, when an affiliate cedes Specified Canadian Risks an amount equal to the difference between the fair market value of the consideration provided in respect of the ceding of the Specified Canadian Risks and the affiliate's cost in respect of these Specified Canadian Risks is included in computing the affiliate's FAPI.

The ceding of the Specified Canadian Risks is deemed to be a separate business, other than an active business, carried on by the affiliate and any income of the affiliate that pertains to or is incident to that business is deemed to be income from a business other than an active business, and as such, FAPI.

This measure will apply to taxation years of taxpayers that begin on or after Budget Day.

The Federal Government invites interested stakeholders to submit comments on this measure by June 30, 2015.

Update on Tax Planning by Multinational Enterprises

The Federal Government reiterated its support for the Organisation for Economic Co-operation and Development (the "OECD") Action Plan on Base Erosion and Profit Shifting ("BEPS"),  released by the OECD in July 2013, together with various OECD reports related thereto.  BEPS generally refers to tax planning undertaken by multinational enterprises to shift profits from high-tax jurisdictions to low-tax jurisdictions.

The Budget does not contain any unilateral measures in respect of the BEPS project, such as the anti-treaty shopping rules included in Budget 2014.  In August 2014, the Federal Government announced that the anti-treaty shopping rules proposed in Budget 2014 would be put on the backburner pending completion of the OECD's work on the BEPS project.

At the hearing of the Australian Senate Economics References Committee in Canberra on April 9, 2015, Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration at the OECD, expressed the view that "unilateral actions are not exactly . . . what the [OECD] is trying to develop, which is, 'Let's wait for a comprehensive package and then countries will decide.'" Canada's position with respect to the BEPS project appears to be in line with the OECD.  This can be contrasted with the UK's unilateral action in respect of BEPS, evidenced by the introduction of a diverted profits tax.

Update on the Automatic Exchange of Information for Tax Purposes

In November 2014, Canada and the other G-20 countries endorsed a new common reporting standard for automatic information exchange developed by the OECD, and committed to a first exchange of information by 2017 or 2018. The G-20 Finance Ministers committed in February 2015 to work towards completing the necessary legislative procedures within the agreed time frame.

Under the new standard, foreign tax authorities will provide information to the CRA relating to financial accounts held by Canadian residents in their jurisdictions. The CRA will, on a reciprocal basis, provide corresponding information to the foreign tax authorities on Canadian accounts held by residents of their jurisdictions.

In 2014, Canada and the United States signed an Intergovernmental Agreement (the "IGA"), ratified by Canada in June 2014, to implement the U.S. Foreign Account Tax Compliance Act.  The IGA, specific Canadian legislation and the CRA's administrative guidelines apply to financial institutions resident in Canada, excluding branches in foreign jurisdictions and Canadian branches of non resident financial institutions ("Canadian Financial Institutions").  Canadian Financial Institutions are required to identify non-resident clients who hold accounts that must be reported to the IRS, and file information returns for those accounts by May 2nd of each year in respect of the prior calendar year.

In order for the CRA to obtain the information to be exchanged under the IGA, the common reporting standard will require Canadian Financial Institutions to implement due diligence procedures to identify accounts held by non-residents and to report certain information relating to these accounts to the CRA. It will not require reporting on accounts held by residents of Canada with foreign citizenship. The standard includes important safeguards to protect taxpayer confidentiality and ensure the exchanged information is used only by tax authorities and only for tax purposes.

The Budget includes a proposal to implement the common reporting standard commencing on July 1, 2017, allowing a first exchange of information in 2018. As of the implementation date, Canadian Financial Institutions will be expected to have procedures in place to identify accounts held by residents of any country other than Canada and to report the required information to the CRA.

It is expected that as the CRA formalizes exchange arrangements with other jurisdictions and is satisfied that each jurisdiction has appropriate capacity and safeguards in place, the information will begin to be exchanged on a reciprocal, bilateral basis.

The Federal Government announced that draft legislative proposals will be released for comments in the coming months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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