Canada: A Refresher On Employer Certification Program – Relief From Canadian Witholding

Last Updated: August 15 2018
Article by Nupur Rishi

Canadian tax rules require ALL EMPLOYERS to withhold Canadian income tax from remuneration paid to employees providing services in Canada per Regulation 102 (Reg. 102). As a result, even foreign employers must withhold Canadian payroll taxes from remuneration paid to non-resident employees who are performing employment duties in Canada. Such obligation applies despite the fact that an employee might have been exempt from Canadian tax on such earnings as a result of a tax treaty between Canada and the employee's country of residence.

To mitigate the cash flow challenges imposed by Reg. 102 withholding, the Canada Revenue Agency (CRA) allows employees to apply for a waiver of such obligation on a case by case basis. This waiver process was, however, found to be administratively burdensome and impractical as a separate waiver was required for each individual employee which were required to be filed in advance of the services being provided.

Consequently, due to increasing demand from the international business community and to make doing business in Canada easier for foreign employers, the CRA introduced its alternative Certification program in January 2016. This program provides "qualifying non-resident employers" an exemption from Reg. 102 withholding requirements on remuneration paid to "qualifying non-resident employees" for employment duties rendered in Canada.

With this program being in place for more than two years, here is a refresher on the specifics of the program to remind the non-Canadian employers of their options to obtain relief from withholding when sending employees to Canada for short periods of time.

Qualifying non-resident employer

In order for a non-resident employer to qualify under this program, they must be:

  • A resident in a country with which Canada has a tax treaty, and
  • Certified by the Minister by filing Form RC473, "Application for Non-Resident Employer Certification," with the CRA

Partnerships where 90% or more of their annual income is allocated to partners resident in countries with which Canada has a tax treaty and US limited liability companies (LLCs) are also eligible to apply for certification.

Qualifying non-resident employee

A qualifying non-resident employee must be:

  • A resident in a country with which Canada has a tax treaty,
  • Exempt from Canadian income tax under the tax treaty, and
  • Either:

    • Work in Canada for < 45 days in the calendar year that includes the time of the payment, or
    • Present in Canada for < 90 days in any 12 month period that includes the time of payment.

Once certified, the qualifying employer will no longer be required to withhold Canadian income tax at source on remuneration paid to a qualifying employee for the period under certification.

Compliance requirements

Once a non-resident employer has been certified, the employer is obligated to:

  • Evaluate and document how and if employees meet all the criteria of being a qualifying non-resident employee;
  • Track and record the number of days each qualifying non-resident employee is working or physically present in Canada, and the remuneration attributable to workdays in Canada on a proactive basis;
  • Obtain a Canadian Business Number and register for a payroll account if tax remittances are required;
  • File T4 slips and a T4 summary for qualifying non-resident employees who earn more than C$10,000 of remuneration attributable to Canadian workdays during the year (individual tax numbers may not be necessary);
  • File any necessary Canadian income tax returns for the calendar years under certification period; and,
  • Make books and records available to the CRA upon request.

Failure to comply with these requirements can cause the CRA to revoke an employer's certification status. As such, proper policies and processes are required for employers to maintain their certification status and to respond to CRA review letters.

Other Considerations

Obligations under the Canada Pension Plan (CPP) and Employment Insurance (EI) regime are not covered by the certification. The non-resident employer must still ensure that an exemption is available under separate regulations before forgoing any CPP or EI remittance.

If a non-resident employer has been non-compliant with Canadian payroll tax obligations in the past, they will not be precluded from being eligible for the new certification. However, the certification will not absolve the non-resident employer from any taxes, interest, and penalties stemming from non-compliance in a prior period.

If the employee does not meet the requirements to be a qualified employee based on the duration of travel to Canada, but would still be exempt from Canadian tax under the treaty, then the employer will need to either 1) remit taxes or 2) file a traditional waiver application for each employee to the CRA to seek relief from witholdings.

Through this program, the CRA has attempted to reduce the red tape and administrative burdens previously placed on non-resident employers providing services in Canada through its employees. The time for foreign employers to take advantage of this much desired program is NOW.

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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