The federal government's Budget 2015, introduced April 21, 2015, proposed an exemption that will offer some relief to non-resident employers with respect to withholding taxes on amounts paid to non-resident employees working in Canada. The exemption is to be effective January 1, 2016.

At present, employers (whether resident in Canada or not) are required to withhold amounts on account of the income tax liability of their employees performing services in Canada (whether the employees are residents of Canada or not). This is the case even where one of Canada's tax treaties applies to exempt a non-Canadian resident employee from Canadian tax on his or her employment income, unless a formal waiver is obtained ahead of time. Because it is not always practical to obtain a waiver, many times the employer will withhold and remit Canadian taxes and the employee will have to file a Canadian tax return to claim, based on the treaty exemption, the taxes withheld. This process can be cumbersome.

Circumstances such as these are fairly common. Under the Canada-United States treaty, for example, a US-resident employee will generally be exempt from Canadian tax if she remains in Canada for no more than 183 days in a 12-month period and if her salary is not borne by a Canadian resident or by a permanent establishment of her employer in Canada.

The administrative burden of the current regime on non-resident entities doing business in Canada is already significant. As noted above, waivers can sometimes be obtained on an employee-by-employee basis, but this system is highly inefficient. The result is that professional fees can exceed the amounts which must be withheld from employees. The proposed relief is aimed at eliminating some of these inefficiencies in the most clear-cut cases.

Under these new rules, a "qualifying employer" will not be required to withhold amounts from the income earned in Canada by a "qualifying employee". To qualify:

Qualifying Employee

Qualifying Employer

(1) the employee must be exempt from Canadian tax under a treaty

(3) the employer must be resident in a jurisdiction that has a tax treaty with Canada

(2) the employee cannot be in Canada for 90 days or more in any 12-month period that includes the time of payment

(4) the employer must not carry on business through a permanent establishment in Canada

(5) the employer must be certified by the Minister

It appears that the certification required from the Minister will be largely a formality if the employer meets the other conditions for qualification.

The exemption from withholding will not affect any reporting obligations of the employer with regard to amounts paid to its employees. Nor will the exemption affect withholding for employees who are in Canada for 90 days or more in a 12-month period, but are nevertheless exempt from Canadian income tax.

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