Canada: Tax Withholding Obligations Of Non-Resident Employers: Further Exemption Details Released

In its 2015 Budget, the Canadian federal government announced its intention to exempt "certified" non-resident employers from the obligation to withhold and remit income tax in respect of certain employees that perform duties in Canada. The Canada Revenue Agency (the "CRA") recently released the application form that a non-resident employer must use to secure relief under the new exemption regime. However, if non-residents wish to rely on the new exemption from the beginning of 2016, they must act fast as relief retroactive to the beginning of the year must be requested by March 1st.1

Background

In the past, non-resident employers have been required to withhold a portion of the remuneration paid to a non-resident employee in respect of services performed in Canada and remit such amounts to the CRA. While the non-resident employee might not have been subject to Canadian income tax by virtue of a tax treaty, the employer was nevertheless required to withhold and remit tax, and the employee was thereafter required to file a Canadian tax return to obtain a refund of the tax withheld.

As an administrative matter, the CRA permits non-resident employees to apply for a waiver that suspends the obligation to withhold under certain circumstances. Unfortunately, requests for such waivers are time consuming and require the submission of a significant amount of information. In addition, such waivers only apply in respect of a single employee, are narrow in scope, and need to be sought well in advance of a non-resident employee performing duties in Canada. As a consequence, the waiver process is widely regarded as cumbersome and impractical in most cases.

New Relieving Measures

In July 2015, the government introduced statutory amendments in support of its promise to ease the withholding and reporting burdens placed on non-resident employers (the "Relieving Measures")2.

The Relieving Measures provide that an employer will not be required to make income tax withholdings if (i) the employer is a "qualifying non-resident employer", and (ii) the employee is a "qualifying non-resident employee".

"Qualifying Non-Resident Employers"

To be a "qualifying non-resident employer", an employer must satisfy two conditions.

First, the employer must be resident in a country with which Canada has a tax treaty.3

Second, the employer must be "certified" by the Minister of National Revenue (Canada) ("Minister"). The Relieving Measures provide that the Minister may certify an employer for a specified period of time if the employer has applied in prescribed form, and the Minister is satisfied that the employer meets both (i) the treaty residence requirement described above, and (ii) any other conditions established by the Minister.

It is ultimately in the discretion of the Minister whether to "certify" a non-resident employer, and the Minister may impose any conditions on certification that she deems appropriate, which may change over time.

At the time of the release of the Relieving Measures, the prescribed form to be used to apply for certification, and the list of the qualifying conditions to be imposed by the Minister governing certification, were not released.

"Qualifying Non-Resident Employees"

To be a "qualifying non-resident employee", an employee must (i) be resident in a country with which Canada has a tax treaty, (ii) not be liable to pay general Canadian income tax in respect of payments received from the qualifying non-resident employer because of that treaty, and (iii) work in Canada for less than 45 days in the calendar year that includes the time of a payment or be present in Canada for less than 90 days in any 12-month period that includes the time of a payment.

Employers may encounter difficulties in applying the foregoing tests. For instance, determining the residence of an employee can be difficult where facts relating to the employee's personal circumstances are not readily available, or the employee maintains homes in multiple jurisdictions. In addition, to be a "qualifying non-resident employee", an employee must be able to claim the benefits afforded by a tax treaty. Where a treaty imposes conditions on the ability to claim treaty relief, determining whether an employee is entitled to the benefits of the treaty may be challenging. Finally, an employee's status as a "qualifying non-resident employee" is dependent on the employee working or being present in Canada for less than a specified number of days. Where work schedules are varied, or the employee may be present in Canada for personal reasons or in respect of employment by others, the ability to determine whether the "days in Canada" test is satisfied may again be limited.

Employer Certification

In the middle of January 2016, the CRA released the list of conditions that must be satisfied for the CRA to certify a particular non-resident employer as a "qualifying non-resident employer", along with the prescribed form to be used to apply for certification.

To obtain certification as a "qualifying non-resident employer", a non-resident must submit new Form RC473 to the CRA (the "Application Form"). (A copy of the Application Form can be accessed here.)

A non-resident must have a CRA Business Number in order to apply for certification. (If a non-resident employer does not have a Business Number, the non-resident is required to register for a Business Number when submitting its Application Form.)

The Application Form requires a non-resident to submit detailed information regarding the applicant's business and activities in Canada, including the following:

  1. whether the non-resident provides services in Canada pursuant to a contract;
  2. the estimated date that the non-resident's first employee will arrive in Canada;
  3. the estimated number of employees of the non-resident that will come to Canada during the certification period;
  4. the employer's industry (including additional details if the non-resident is involved in the entertainment industry); and
  5. the types of services that the non-resident's employee(s) will be providing in Canada.

The Application Form also requires a non-resident employer to provide certain covenants to the CRA, including covenants that the employer will:

  1. comply with "all obligations and requirements" imposed on a "qualifying non-resident employer";
  2. inform the CRA immediately of any changes to the information presented in the Application Form, or if the employer no longer meets the conditions of a "qualifying non-resident employer"; and
  3. only exempt payments from withholding upon receipt of an approval letter from the CRA certifying that the employer is a "qualifying non-resident employer".

The CRA has indicated that the "obligations and requirements" of a qualifying non-resident employer require the employer to:

  • evaluate and document how a particular employee meets the definition of a "qualifying non-resident employee" at the time the employer pays any employment income to the particular employee. (The CRA has stated that, in performing such an evaluation, the employer must (a) make sure the employee meets the definition of a "qualifying non-resident employee" on an ongoing basis, (b) obtain documents to support the employee's country of residence, and (c) have in its possession the information/documentation necessary to demonstrate how the employee is expected to be exempt from tax in Canada because of a tax treaty.);
  • track and document, on an ongoing basis, the number of days a qualifying non-resident employee is working or is present in Canada, and the employment income that corresponds to those days;
  • prepare and file information returns in respect of each non-resident employee (including T4 slips and T4 summaries) unless such reporting is excluded under the applicable income tax regulations (as discussed in greater detail below).
  • complete and file Canadian income tax returns for those calendar years covered by the certification period; and
  • make its books and records available in Canada for the CRA to inspect so that it can verify that the employer is meeting (a) the covenants made in the Application Form, and (b) its withholding requirements under the Income Tax Act (Canada) (the "Tax Act").

Exemptions from withholdings under the Relieving Measures will not apply to a particular non-resident employer until the employer has been notified in writing that they have been certified. The CRA has indicated that an Application Form must be submitted at least 30 days prior to the commencement of a non-resident employee providing services in Canada for the non-resident applicant.

Certifications will not be granted by the CRA on a retroactive basis. However, as a transitional measure, the CRA has indicated that, if a completed Application Form is submitted by the end of the day on March 1, 2016, the CRA may retroactively certify a non-resident employer as of January 1, 2016.

Once granted, certifications may remain valid for up to two calendar years. Employers are permitted to subsequently request the extension of the two-year certification period.

Advantages of Certification

A qualifying non-resident employer will be relieved of the obligation to make income tax source withholdings from remuneration paid to qualifying non-resident employees.

If a qualifying non-resident employer does not withhold and remit income tax in respect of a particular employee that the employer thought was a qualifying non-resident employee, and it is subsequently demonstrated that the employee was not a qualifying non-resident employee, the employer will not be subject to a penalty if, after "reasonable inquiry", the employer had no reason to believe, at the time of each payment of remuneration, that the employee was not a qualifying non-resident employee. (What constitutes a "reasonable inquiry" is not defined in the Tax Act; however, the CRA has indicated that a "reasonable inquiry" requires an employer to "take prudent measures to proactively monitor and confirm" that its employee is not a qualifying non-resident employee.)

The Relieving Measures further provide that a non-resident employer is not required to file Canadian information returns and reporting slips (i.e., T4 reporting documentation) in respect of a qualifying non-resident employee if the employer, after reasonable inquiry, has no reason to believe that the employee's total taxable income earned in Canada during the relevant calendar year is more than CAD$10,000.

In considering whether the exemption from information reporting requirements applies, it is critical to note that the applicable test differs from the test used to determine whether source withholdings and remittances are required. Most significantly, the test focuses on the employee's taxable income earned in Canada during the year and is not governed by the number of days the employee spent in Canada. The test looks to all sources of taxable income, not just amounts received from the non-resident employer, and is based on the gross amount of taxable income earned in Canada by the employee, without regard to the portion of such income that may not ultimately be subject to Canadian taxation by virtue of a tax treaty.

Other Implications of Certification

The CRA has expressly indicated that it will not consider an applicant's compliance history with respect to its past withholding, remittance and reporting obligations when reviewing an application for certification. However, the CRA has stressed that certification does not cancel any past tax, penalty or interest liability, and encourages applicants to consider making a voluntary disclosure to address past compliance deficiencies in advance of submitting an Application Form.

The covenants made under the Application Form require a non-resident employer to maintain detailed records of the activities and presence of an employee in Canada, and undertake meaningful due diligence in respect of the residency of the employee and his/her entitlement to claim the benefits of a particular tax treaty.

Exemption from Canadian income tax source withholding obligations also does not relieve the employer of the potential obligation to withhold and remit amounts from remuneration in respect of Canada Pension Plan and Canadian Employment Insurance obligations.

Finally, the obligation to make books and records available in Canada for CRA review may signal an enhanced likelihood that the non-resident employer may be subject to a CRA audit review in the future.

Revocation of Certification

The CRA reserves the right to revoke a certification if it believes that the non-resident employer fails to satisfy its covenants in the Application Form, or if the facts presented in the Application Form prove to be inaccurate. If certification is revoked, the CRA has indicated that the employer may become liable to withhold and remit tax to the CRA and may be subject to any related penalties and interest for the entire period that the employer was certified.

* * *

While the Relieving Measures represent welcome relief to certain non-resident employers that dispatch employees to Canada for limited purposes, non-residents will need to carefully consider the obligations imposed on "qualifying non-resident employers" prior to seeking certification. 

1 On January 28th, the CRA announced that the deadline to request retroactive relief would be extended from February 1st to March 1st.

2 It is expected that the Relieving Measures will be enacted into law at some point this year. The CRA has indicated that it will administer the Relieving Measures as if they have already been enacted into law.

3 If the employer is a partnership, members of the partnership that are entitled to not less than 90% of the income or loss of the partnership must generally be resident in a country with which Canada has a tax treaty.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2016

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Carl Irvine
Michel M. Ranger
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions