The COVID-19 crisis has led to travel restrictions that have
required many people to work remotely, and sometimes to remain in
jurisdictions other than those in which they typically perform
their duties. On April 3, 2020, The Organisation for
Economic Cooperation and Development (OECD) Secretariat released an
analysis of the impact of the COVID-19 crisis on various
cross-border tax matters that are the subject of double taxation
treaties and urged tax administrations to provide additional
guidance.
On May 20, 2020, the Canada Revenue Agency (CRA) has released their
Guidance on international income tax issues
raised by the COVID-19 crisis (Guidance) with respect to
how the CRA will administer a number of the cross-border taxation
issues. These have arisen because of individuals who would
typically not carry out their duties in Canada now being required
to do so as a result of travel restrictions brought about by the
COVID-19 crisis. Other tax authorities, including in the United
Kingdom and Australia, have previously provided similar guidance.
The CRA's Guidance also addresses COVID-19 related delays in
the processing of certain taxpayer applications and requests.
The Guidance specifically notes that it is intended to assist
taxpayers during this time of crisis and does not represent broader
CRA policy or any change in CRA's "commitment to combat
international tax evasion and avoidance." It warns that
taxpayers engaging in "schemes" that attempt to exploit
the crisis or Guidance can expect the CRA to use all tools at its
disposal to protect the integrity of the tax system.
With some minor exceptions, the Guidance provides welcome relief
from consequences that might otherwise result from strict
compliance with rules and procedures that never envisioned the
circumstances created by the COVID-19 crisis. The Guidance will
apply from March 16, 2020, to June 29, 2020, unless extended.
RESIDENCE ISSUES
Canadian residents are generally liable to tax under the Income Tax Act (Canada) (ITA) on their worldwide income, while non-residents are only liable to tax on certain income with a source in Canada. Residence is generally a common law concept, subject to certain rules that may deem persons to be resident in Canada under particular circumstances. Bilateral tax treaties entered into by Canada with other countries often contain "tie-breaker" rules that address cases where a person is considered to be resident in both countries under their domestic laws. The Guidance addresses issues that may be faced by both individuals and corporations as a result of travel restrictions arising during the COVID-19 crisis.
Corporations
Residence for corporations is determined based on the common law
"central management and control" test, which generally
looks to the place where the board of directors meets and makes the
strategic management decisions about the corporation's
business.
The Guidance acknowledges that, during the COVID-19 crisis,
corporations typically resident in foreign jurisdictions may have
directors participating in board meetings while physically present
in Canada because they are unable to travel to the foreign
jurisdictions. The CRA says that, for purposes of determining
residence under bilateral tax treaties that rely on the "place
of effective management" or other factors to break the dual
residence "tie," Canada will not consider a corporation
to become resident in Canada solely because a director must
participate in a board meeting from Canada due to travel
restrictions.
The Guidance does not address residence determinations more
generally, saying only that determinations involving potential dual
residency with non-treaty countries will be determined on a
case-by-case basis. This is disappointing, as the issue of
residence under the common law test is relevant not only for
purposes of determining the residence of a corporation that is
ordinarily resident in a non-treaty country, but also for purposes
of surplus computations under the foreign affiliate rules in the
ITA.
Individuals
Residence for individuals is also generally a common law
determination, based on the residential ties of the individual with
Canada. A deeming rule in the ITA also causes an individual who is
physically present in Canada for 183 or more days in a tax year to
be considered resident in Canada for the year.
The Guidance acknowledges that individuals who were in Canada at
the time travel restrictions were imposed may not have been able to
leave Canada and return to their countries of residence as
intended. The CRA will not consider an individual to be resident in
Canada under the common law where they have remained in Canada
solely because of travel restrictions. Also, as a temporary
administrative concession, the CRA will not consider days during
which an individual is present in Canada and unable to return to
their country of residence solely because of travel restrictions to
count towards the 183-day deemed residency test. This position is
contingent upon such individuals returning to their countries of
residence as soon as they can.
CARRYING ON BUSINESS AND PERMANENT ESTABLISHMENT ISSUES
A non-resident entity that is considered to carry on business in
Canada for purposes of the ITA is required to file a tax return for
the relevant taxation year and will be subject to Canadian tax on
its net income from carrying on business in Canada, subject to any
relief available under an applicable tax treaty.
Whether a non-resident is considered to carry on business in Canada
for purposes of the ITA is a factual determination based on common
law principles. In making such determination, the courts generally
look to a number of factors, including where the operations from
which revenue is generated take place. The ITA also deems a
non-resident to be carrying on business in Canada where it solicits
orders or offers anything for sale in Canada through an agent or
servant, regardless whether the contract or transaction is to be
completed inside or outside Canada.
The Obligation to File a Tax Return
In the Guidance, the CRA maintains that a non-resident entity will be required to file a Canadian tax return if it is considered to be carrying on business in Canada for purposes of the ITA, even if the only reason that is the case is that one or more individuals are present in Canada due to travel restrictions imposed because of COVID-19. This filing requirement applies whether or not the non-resident entity is resident in a jurisdiction with which Canada has a tax treaty.
The Obligation to Pay Tax – Non-Treaty Residents
Where the non-resident entity is not resident in a jurisdiction with which Canada has a tax treaty, the non-resident would be subject to tax on its income from carrying on business in Canada for purposes of the ITA. In the Guidance, the CRA states that if it can be demonstrated by the non-resident entity that it surpassed the carrying on business in Canada threshold solely as a result of the COVID-19 travel restrictions, the CRA will determine on a case-by-case basis whether administrative relief from the obligation to pay Canadian tax would be appropriate
The Obligation to Pay Tax – Treaty-Residents
Even if a non-resident is considered to carry on a business in Canada for purposes of the ITA, such non-resident may still be entitled to a treaty-based exemption from Canadian income tax, provided that the entity does not have a permanent establishment (PE) in Canada, qualifies as a resident of the other jurisdiction with which Canada has entered into the relevant treaty and is entitled to the benefits of such treaty. Although the definition of a PE may differ from treaty-to-treaty, it typically includes the following:
- A fixed place of business through which the business is wholly or partly carried on, including a place of management, a branch and an office
- A person acting in Canada on behalf of the non-resident—other than an agent of independent status acting in the ordinary course of its business—who has, and habitually exercises in Canada, an authority to conclude contracts in the name of the non-resident
Some tax treaties, including the Canada-U.S. Tax Treaty (U.S.
Treaty), also include a "services-based" PE
concept.
The CRA has provided in the Guidance that where a non-resident
entity is resident in a jurisdiction with which Canada has a tax
treaty, the CRA will not consider the non-resident to have a PE in
Canada solely because its employees perform their employment duties
in Canada as a result of the travel restrictions brought about by
the COVID-19 crisis.
The Guidance also provides that the CRA will not consider a
non-resident entity to have a Canadian PE solely due to a dependent
agent, such as an employee concluding contracts in Canada on behalf
of the non-resident entity, provided that such activities are
limited to the period during which COVID-19 travel restrictions are
in place and those activities would not have been performed in
Canada but for the travel restrictions.
The CRA also states that it will not include any days that an
individual was present in Canada because of the COVID-19 crisis in
determining whether an individual meets the 183-day presence test
in a "services PE" provision of a tax treaty, such as
Article V(9)(a) of the U.S. Treaty, provided that such presence in
Canada was due solely to COVID-19 travel restrictions.
CROSS-BORDER EMPLOYEES
The Guidance also addresses issues relating to employees who work in a country other than their country of residence and whose mobility has been affected by travel restrictions.
U.S.- and Other Non-Residents Performing Duties in Canada
Some bilateral tax treaties, including the U.S. Treaty, allow Canada to tax the wages and other remuneration of employees whose duties are performed in Canada, provided that, amongst other threshold requirements, the employee is physically present in Canada for more than 183 days in the tax year. The Guidance assures employers and employees that, for employees who are now exercising their duties in Canada for an extended period of time solely as a result of travel restrictions, those days will not be counted toward the 183-day test in the U.S. Treaty and other tax treaties with similar "days of presence" thresholds. As such, these individuals will continue to benefit from treaty relief notwithstanding their extended periods of physical presence.
Canadian Residents
Non-resident employers of Canadian residents are required to deduct withholdings at source from wages they pay, even if the employment duties are performed outside of Canada. In some circumstances, the CRA will issue a "letter of authority" to such an employee to allow the non-resident employer to reduce Canadian withholdings to reflect the foreign tax credit available to the Canadian employee in respect of taxes payable to the foreign country. The Guidance confirms that, where a Canadian-resident employee of a non-resident employer that has been issued such a "letter of authority" for the taxation year that includes the crisis is forced to perform their employment duties in Canada on an exceptional and temporary basis as a result of travel restrictions, the letter of authority will continue to apply and the withholding obligations of the employer will not change in Canada. The Guidance restricts this policy to circumstances where there has been no change to the withholding obligations of the non-resident entity in the other country.
WAIVER REQUESTS FOR PAYMENTS MADE TO NON-RESIDENTS FOR SERVICES PROVIDED IN CANADA
If a payment is made to a non-resident for the provision of
services performed in Canada, the payor will generally have an
obligation pursuant to Regulation 105 to the ITA (Reg. 105) to
withhold 15 per cent of the amount of such fees relating to such
services.
A non-resident may make an application to the CRA for a waiver of
the Reg. 105 withholding requirement in certain circumstances, such
as the non-resident being entitled to an exemption from Canadian
tax pursuant to an applicable tax treaty. As a result of the
COVID-19 crisis, the processing of such Reg. 105 waiver requests
was temporarily interrupted and, although waiver requests are now
being processed, the CRA's ability to process such requests has
been and may continue to be delayed.
The Guidance provides that the CRA will accept urgent Reg. 105
waiver requests submitted electronically on a temporary basis.
Additionally, where a Reg. 105 waiver request has been submitted to
the CRA and, due to the COVID-19 crisis, the CRA was unable to
process the request within 30 days, the CRA will not assess a
person who fails to deduct, withhold or remit amounts required
under Reg. 105 any amount as required by Reg. 105, provided that
the sole reason the non-resident could not obtain a Reg. 105 waiver
was due to the delay in the CRA being able to process the waiver
request because of the COVID-19 crisis. The Guidance states that
the person paying the amount must also demonstrate that reasonable
steps were taken to ascertain that the non-resident person was
entitled to a reduction or elimination of Canadian withholding tax
by virtue of an income tax treaty with Canada.
COMFORT LETTERS FOR DISPOSITIONS OF TAXABLE CANADIAN PROPERTY
The ITA requires a non-resident vendor who disposes of certain
"taxable Canadian property" to notify the CRA before, or
within 10 days after, the disposition. Where the notification is
provided and the vendor also pays an amount to cover the tax on any
gain on the disposition, or provides acceptable security for such
tax, the CRA will issue a "Section 116 Certificate." A
purchaser of taxable Canadian property from a non-resident vendor
who does not receive a Section 116 Certificate is required to
withhold and remit from the purchase price for the property.
Processing of Section 116 Certificates was interrupted during the
COVID-19 crisis, and, while processing has resumed, the time to
issue a certificate has been delayed. The Guidance provides that
urgent requests for "comfort letters" advising
purchasers, vendors or their representatives to retain the funds
withheld from the purchase price for taxable Canadian
property—rather than making a remittance—may be
submitted on a temporary basis by contacting the CRA's
individual tax enquiries line at 1-800-959-8281.
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.