Withholding rules can be burdensome for non-resident employers and employees
Many people hear the term "business travel" and think
of the usual perils — jet lag, roaming charges,
lost luggage. Potentially more costly are the tax risks that
businesses incur when they send their employees into or out of
Canada on temporary work assignments.
Non-resident employers will incur Canadian tax-withholding
obligations on salary paid to their employees that is attributable
to work performed in Canada. It doesn't matter whether the
employees are posted to a customer's premises for three months
or working from a hotel room for three days. When an employee, even
a non-resident, earns a salary for work performed in Canada,
withholding is required.
This surprises (and irritates) many non-resident employers, who
often assume that if they have no physical premises in Canada, they
fall outside the scope of the Canadian tax regime. There is a
significant administrative cost to setting up a Canadian payroll
account solely for the purpose of processing the salary of these
employees. But an employer that does not comply with its Canadian
withholding obligations is liable to pay the tax it should have
withheld from the employee, plus penalties and interest. Where the
non-resident is a corporation, its directors may be jointly and
severally liable.
The withholding rules can also be burdensome for non-resident
employees who are already paying tax to their home country on their
Canadian-source income. These employees may be exempt from Canadian
tax by virtue of a tax treaty between the home country and Canada,
but the withholding rule applies to the employer and operates
independently of the treaty. The treaty exemption will entitle
employees to a refund of the taxes withheld, but this is accessible
only by filing a Canadian tax return after the year end, and the
employees will be out of pocket until the refund is processed.
Employers may consider extending short-term loans to employees to
assist with this cash-flow problem.
Relief from the withholding obligation is sometimes available. If
the non-resident employee's salary for work performed in Canada
is treaty-exempt and under $5,000 Cdn. ($10,000 if the employee is
a U.S. resident), the Canada Revenue Agency may waive the
withholding requirement. But the waiver application must be
submitted in advance; withholding is required on salary paid while
the application is being processed. The only situation in which the
CRA may waive withholding without an application is where an
employee attends a conference in Canada for 10 days or less, and
remains below $5,000 / $10,000. Those limits are arbitrary, and the
CRA has acknowledged that it inconveniences many business
travellers, but has not signalled any intention to change it.
An employee's activities in Canada may also cause the employer
to be "carrying on business" in Canada, which the Income
Tax Act defines very broadly. It includes the soliciting of orders
or offering anything for sale in Canada, even if the sale
transaction is completed outside Canada.
Any non-resident who is "carrying on business" in Canada
must file a Canadian tax return. Even if it is not liable for
Canadian tax because it has no "permanent establishment"
(PE) in Canada under the applicable treaty, a return is required.
Failure to file a return (even one which reports no liability for
Canadian tax, known as a "nil" return) will lead to a
penalty of up to $2,500 a year. Ironically, the cost of preparing
and filing even a nil return can easily exceed that amount.
The PE question is also significant: Depending on the terms of the
applicable tax treaty, an employee's presence in Canada may
create a PE if the employee has, and habitually exercises in
Canada, the authority to conclude contracts in the employer's
name. In that case, the non-resident employer will be obliged to
pay tax in Canada on the profits attributable to the PE. To avoid
this, many non-resident businesses establish a policy reserving
final approval over Canadian sales to employees working outside
Canada.
Cross-border secondment arrangements should be approached
carefully. A corporation may, for example, establish a subsidiary
in another country and wish to assign certain employees to the
subsidiary's premises temporarily. This will engage the
transfer pricing rules that Canada and most other countries impose
on cross-border, non-arm's length transactions to ensure that
pricing between related parties is consistent with arm's length
terms. If the pricing is too high or too low, the CRA or the tax
authority of the other country may impose an adjustment to the
pricing. Parties must refer to the OECD's transfer pricing
guidelines and document the methodology they used to determine
their pricing in order to avoid a penalty.
While compliance with these requirements may seem daunting, there
are strategies available to minimize the expense and inconvenience
to non-resident employers and their employees. The key to reducing
the employer's tax exposure is advance planning with regard to
the timing and duration of employee travel and the scope of their
activities in Canada. As Yogi Berra may or may not have said:
"If you don't know where you're going, you might wind
up someplace else."
Previously published in The Lawyers Weekly.
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.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.