Canadian Taxation of Non-Resident Employees - Dale & ? 2017-06-20 Canadian Taxation of NonResident

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    03-Jul-2018

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CanadianTaxationofNonResidentEmployeesMultinational business requiresmultinational tax planning, for employees aswell as employers.When sendingemployeesabroad, it isgenerallyup to theemployer tominimize theemployeesforeign taxesand toensure thatall foreign taxesarepaidand filingsmade.The followingbrieflydescribesthetaxissuestobeaddressedwhentransferringorsecondingemployeestoCanada.WhatarethethresholdsbelowwhichnonresidentemployeesarenottaxableinCanada?ThegeneralruleunderCanadastypicaltaxtreaty isthatanonresidentemployee isexemptfromCanadianincometaxifthreeconditionsaremet:(i) theemployee ispresent inCanada fornomore than183days inany12monthperiodbeginningorendinginthefiscalyearconcerned;(ii) theemployeesremunerationispaidbyoronbehalfofanemployerwhoisnotaresidentofCanada;and(iii) the employees remuneration is not borne by a Canadian permanentestablishmentofthenonresidentemployer. 183daysOnastrict reading,anonresidentemployeecouldbesubject toCanadian income tax for two taxationyearsbecauseof timespent inCanadaduringasingle12monthperiod.Thissituationarisesbecauseasingle12monthperiodwould frequentlybegin inone taxationyearandend inanother. It is,however,understoodthattheCanadaRevenueAgency(CRA)wouldonlytaxanonresidentforasingletaxationyearnotwithstandingthattheparticular12monthperiodtouchesupontwo.Thisconceptofarolling12monthperiodwasintroducedbytheOrganisationforEconomicCooperationandDevelopment(OECD)intheirModelTaxConventionwithRespecttoTaxesonIncomeandonCapital(OECDModel Convention). According to the OECDs technical notes, the phrase 12month periodbeginningorendinginthefiscalyearconcernedisintendedtocatchsituationsinwhichtheemployeestime is allocated between taxation years. Canadas treaties that include language similar to thatintroduced by theOECDModel Convention include thosewith theU.S., France and Germany.UnderCanadas treatywith theU.K., thecriterionrefers to183days in thecalendaryearconcerned.AU.K.residentcouldthereforebeexempt fromCanadian incometaxdespitebeingpresent inCanada for364consecutivedaysifthe182nddaywereDecember31st. EmployerCanadastreatywiththeU.S.differsfromitstreatieswithothercountries,includingtheU.K.,FranceandGermany,bysubstitutingpersonforemployerinthesecondcriterion.UndertheU.S.treaty,then,itisirrelevantwhethertheCanadianresidentpayoristheemployer.IfanonresidentemployeeexercisesitsemploymentinCanadaandispaidbyoronbehalfofapersonresidentinCanadathenthatemployeewillbesubjecttoCanadianincometax.UnderCanadasothertreaties,suchasthosewiththeU.K.,FranceandGermany,theemployeeistaxedinCanadaiftheCanadianresidentpayoristheemployer.Whetherapersonisanemployerisdeterminedunderthedomesticlawsofthesourcecountry.Canadaslawsinthisregardapplyasubstanceoverformapproach.IfaCanadianresidentistheemployerinfactthentheemployeewillbetaxableinCanadanotwithstandingformaldocumentationtothecontrary. BornebyThethirdcriterionappliestosituationsinwhichthenonresidentemployerallocatesthecostoftheemployeesremunerationtoaCanadianbranch.IfthebranchdeductstheamountofthatremunerationfromitstaxableCanadianincomethenthebranchisconsideredtohavebornethatcostandtheexemptionwillnotbeavailable. DeminimusexemptionCanadastreatywiththeU.S.alsodiffersfromitstreatieswithothercountriesbyprovidingademinimusexemption:ifanonresidentemployeesremunerationinrespectofemploymentexercisedinCanadaisCDN$10,000.00orlessinagivencalendaryearthenthatemployeeisnotsubjecttoCanadianincometax.Unfortunately,thisexemptionisnotavailabletoresidentsofGermany,theU.K.orFrance.Whataretheemployerswithholdingandremittanceobligations?EmployersarerequiredtowithholdandremitCanadianincometaxregardlessofwhetheratreatyexemptionapplies.If,however,atreatyexemptionisavailable,theemployeeortheemployer(withtheemployeesauthorization)mayapply forawaiver.Thewaiverapplicationshouldbemade30daysbeforeemployment inCanadabeginsandmustprovide informationastotheapplicabilityofthetreatyexemptionreliedupon,acopyoftheemploymentcontractandsufficientinformationordocumentationtosatisfytheCRAthattheemployeeisresidentinthetreatyjurisdiction.Ifawaiverismadeafterremuneration ispaidtotheemployeethenthewaiverwillonlyapplytosubsequentpayments.In general, Canadas social security agreements with other countries exempt nonresidentemployersfromtheobligationtowithholdandremitcontributionstotheCanadaPensionPlan. Inorder toqualify for theseexemptions, theperiodof thenonresidentemployeesemployment inCanadacannotexceedspecifiedtimelimits.InrespectofemployeesresidentintheU.S.,theU.K.orGermany, theperiodofemployment isnot toexceed5years.Under theagreementwithFrance,theperiodis3years.PremiumsarenotpayableintoCanadasmandatoryemploymentinsuranceprogramifpremiumsinrespectof theemploymentexercised inCanadaarepayableunder theunemployment insurancelawsofthenonresidentemployeeshomejurisdiction.Whataretheemployeesfilingobligations?ThenonresidentemployeewouldonlyberequiredtofileaCanadianincometaxreturnifCanadiantaxwerepayable.If,therefore,awaiverwereobtainedthentheemployeewouldnotfileareturn.If,ontheotherhand,theemployerwithholdsandremitsincometaxthentheemployeemustfileareturninordertoclaimtherebate.If an employer pays the tax on behalf of the employee, the employeewill then have a taxablebenefitintheamountofsuchpayment.Thisresultsinagreatertaxliability,agreatertaxpaymentby the employer and, therefore, a still greater tax liability. This circularity can be addressed bygrossingupthetaxpaymentmadebytheemployerbyanappropriatepercentage.Thetaxcosttotheemployerwouldthereforebegreaterthanwouldotherwisehaveappliedtotheemployee.ImmigrationMattersWhen addressing taxation issues facing nonresident employees, the topic of immigrationmustinevitablybe considered aswell.Our firms ImmigrationPracticeGroupwas created inorder toprovide our international business clients with a comprehensive service offering in order tofacilitatetheentryof foreignworkerstoCanadaandadviseonallmatterspertainingtoCanadianImmigrationLaw.PatrickWestaway isaPartneratDale& Lessmann LLP,aToronto,Ontario,Canadabased full service law firmspecializing in Canadian taxation law. Patrick advises on a broad range of Canadian taxation issues such ascorporate taxplanning, structuring inbound investments, corporate reorganizations, crossborder financings, taxopinions for public disclosure documents, tax assessments, personal taxmatters, wealth preservation,and onfederalandprovincialsalestaxmatters(HST/GST/PST).Patrickalsopracticescorporateandcommercial lawwithanemphasisontheimplementationofmattersrelatedtohistaxplanningpractice.

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