In light of the COVID-19 crisis and the travel restrictions implemented by Canada and many other jurisdictions as well as by businesses (the "Travel Restrictions"), the CRA has temporarily relaxed the way it administers certain rules and requirements contained in the Income Tax Act (Canada) ("ITA") to account for the "forced" and involuntary presence of many non-residents in Canada for an extended period of time. As no one knows how long these Travel Restrictions will remain in effect, the guidelines described below, which apply from March 16, 2020 to June 29, 2020, may be extended by the CRA if necessary.
Deemed Residence: 183-Day Rule
For an individual, being subject to Canadian tax depends on his or her tax residence, which remains essentially a question of fact determined according to connecting factors established in common law. On the other hand, and subject to any applicable tax treaty, a non-resident who, in a calendar year, remains in Canada for more than 183 days is deemed to be a Canadian tax resident for the entire year and as such, becomes subject to Canadian tax on his worldwide source of income.
In applying the common law criteria as well as for the purposes of calculating the 183 days of presence in Canada, the CRA has indicated that neither presence in Canada nor days present in Canada will be taken into account if the individual did not return to his or her country of residence solely because of the Travel Restrictions. This position is only valid, however, with respect to individuals who are otherwise residents of another country, who intend to return to that country and who, in fact, return to that country as soon as possible once the Travel Restrictions are lifted.
Tax Residence of a Non-Canadian Corporation
Similarly to individuals and subject to any applicable tax treaty, the Canadian tax residence of a non-Canadian corporation is established according to criteria developed in common law, namely by determining where the Corporation's central management and control is located ("mind and management"). Among the factors to be considered, one of the most important is the place (i.e. the jurisdiction) where meetings of the board of directors are held.
It is possible that, as a result of the Travel Restrictions, some non-resident individuals attend board meetings of foreign corporations while confined in Canada, which could be an important, if not determining factor in establishing Canadian tax residency for such corporations. Although most tax treaties contain tie-breaker rules in cases where a corporation faces dual tax residency, favouring the jurisdiction of incorporation; there are other treaties where the tie-breaker rules take into account, among other things, where management of the corporation's affairs actually occur.
From an administrative point of view, the CRA will not consider the participation of non-resident individuals at board meetings of non-Canadian corporations while confined in Canada due to Travel Restrictions to be, on its own, sufficient for those corporations to be considered as residents of Canada. On the other hand, for corporations resident in "non-treaty" jurisdictions, the issue of potential dual residency will be determined on a case-by-case basis. The CRA has also clarified that this administrative approach will also apply where other entities, such as limited liability corporations, incorporated in foreign jurisdictions, are considered corporations for the purposes of Canadian tax legislation. Finally, if circumstances so warrant, the CRA will consider adopting a similar approach to determine the residency status of a business trust.
It is however important to remember that the CRA can nevertheless conclude that a non-Canadian corporation is a resident of Canada where its management and control occurs in Canada, even if the meetings of the board of directors are held elsewhere.
Any non-resident entity, whether of a treaty or non-treaty jurisdiction, that carries on business in Canada at any time in a year, must file a Canadian income tax return for that year. That being said, Canada's tax treaties provide that business income generated in Canada by an entity resident in a treaty jurisdiction is taxable in Canada only if that entity's business is conducted in Canada through a permanent establishment, a concept that includes for instance the physical presence of an employee with the ability to bind the foreign entity in Canada.
It is possible that due to the Travel Restrictions, non-resident employees who regularly work outside Canada may be confined within the country and as such, are forced to perform their duties in Canada. In light of these exceptional circumstances, the CRA has indicated that the fact that employees of a non-resident entity are obliged to perform their duties in Canada solely because of the Travel Restrictions will not be sufficient for such entity to be considered to have a permanent establishment in Canada. The CRA takes the same approach with respect to a dependent agent who enters into contracts in Canada on behalf of a non-resident entity during the Travel Restrictions period, to the extent that such activities are limited to the period during which the Travel Restrictions are in effect and that such activities would not have taken place in Canada if it were not for Travel Restrictions. With respect to a resident of a "non-treaty" jurisdiction, where the existence of a permanent establishment in Canada is not required to trigger Canadian tax liability, the CRA will assess any administrative accommodations on a case-by-case basis in situations where the entity can demonstrate that it was carrying on business in Canada solely as a result of the Travel Restrictions.
Finally, for the purposes of the 183-day rule, when determining the "service permanent establishment" under Article V(9)(a) of the Canada-United States Income Tax Convention, the CRA has indicated that it will exclude any day of physical presence in Canada that is solely due to Travel Restrictions.
Cross-Border Employment Income
Generally speaking, any non-resident individual who is employed in Canada is subject to Canadian tax on the employment income he earned while present in Canada. However, some tax treaties, such as the treaty with the United States, provide that a non-resident employee is not subject to Canadian tax on employment income earned while physically present in Canada if the income does not exceed a certain threshold and if the employee has been present in Canada for less than 184 days in any given 12-month period.
To account for the exceptional situation of the pandemic, the CRA has indicated that for the purposes of calculating the 184 day period, days when the employee performs duties in Canada solely because of the Travel Restrictions will not be taken into account.
Generally, and subject to very limited exceptions, any person who pays a non-resident for services rendered in Canada must withhold and remit to the CRA 15% of the amount payable to the non-resident ("Regulation 105"). Similarly, every employer must withhold and remit the amounts prescribed by regulation in respect of compensation to an individual who is employed in Canada ("Regulation 102").
The CRA may, in certain circumstances, exempt the payer and employer from the withholding and remittance obligations as a result of a waiver request submitted to the CRA. During the restricted service period, urgent waiver requests can temporarily be submitted electronically and additional information should be made available soon. In addition, for waiver requests submitted to the CRA that could not be processed within the 30 day period due to service interruption, the CRA has advised that it will not assess a person who has not deducted, withheld or remitted amounts as required by Regulation 105 and Regulation 102 in respect of an amount paid to a non-resident who is the subject of the waiver request in question. This relief is only provided where a non-resident would not have obtained a waiver of the tax withholding requirements from CRA pursuant to Regulation 105 or Regulation 102 as a result of service interruption and where the payer could provide evidence that reasonable efforts were made to ensure that the non-resident person was entitled to a reduction or elimination of withholding tax under an applicable tax treaty. Otherwise, both the non-resident person and the payer must meet their reporting and remittance obligations.
In addition, the CRA will review any other situation on a case-by-case basis to determine whether non-compliance with the ITA can be directly attributed to the effects of the COVID 19 crisis, and if so, the payer or employer who did not withhold and remit will not be assessed.
Disposition of "taxable Canadian property"
Any purchaser of "taxable Canadian property" (for example, real property situated in Canada or shares of a corporation where more than 50% of the value of which is comprised of real property situated in Canada) must withhold and remit a certain percentage of the purchase price of such property to the CRA unless the non-resident has notified the CRA before the sale, or within 10 days of the sale, and has paid the appropriate taxes resulting from it. In such cases, the CRA will issue a certificate (the "116 Certificate") to the vendor and the purchaser. In the absence of a 116 Certificate, the purchaser must remit the amounts withheld to the Receiver General of Canada within 30 days following the end of the month in which the property was acquired (the "Remittance Due Date"). The non-resident must then wait until the end of its taxation year to file a Canadian income tax return and obtain a refund of any excess amounts withheld. Non-remittance by the purchaser of the amount withheld triggers the purchaser's personal liability for such amount.
The COVID-19 crisis resulted in the interruption of the processing service for 116 Certificate requests. Although the CRA is still accepting 116 Certificate requests during the service interruption and has restarted processing them on a limited scale, processing time is longer than usual. If, as a result of these delays, the 116 Certificate is not issued before the Remittance Due Date, the purchaser or vendor may request that the CRA issue a "comfort letter" advising the purchaser to hold the funds (even though technically they are due) until the CRA has completed its review and has requested that the purchaser remit the tax payable. Once determined by the CRA, no penalty and interest will then be charged to the purchaser if the tax is remitted upon request.
There is also a process in place for urgent situations, pending the normal return to service.
The CRA remains sensitive to any other difficult situations that a taxpayer may encounter as a result of COVID-19 or the Travel Restrictions and is prepared to take them into consideration.
Originally published May 29, 2020.
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.