Global Employer Services News

Cross-border work arrangements have become a commodity and not a trend, especially between the Canadian and U.S. borders. Canadian businesses continue to engage U.S. employees through a U.S.-based “employer of record” (EoR). While this structure simplifies U.S. employment compliance for the Canadian business, it might not eliminate Canadian tax obligations when those employees need to work physically in Canada.

Canadian Tax Implications for U.S. Employees

Under Article XV[1] of the Canada–U.S. tax treaty, employment income attributable to Canadian workdays (Canada-source wages) is generally taxable in Canada unless specific conditions are met. Article XV(1) allows the exemption of income if it does not exceed CAD 10,000; under Article XV(2), the exemption applies only if:

• The employee is present in Canada for fewer than 183 days in any 12-month period; and
• The remuneration is not borne by a Canadian employer or permanent establishment.

When a Canadian entity pays a U.S. EoR for the employee’s services, the Canada Revenue Agency (CRA) may assert that the Canadian entity bears the cost of remuneration. This often means the treaty exemption does not apply, making Canada-source wages taxable in Canada, and resulting in tax withholding and reporting obligations in Canada for the employer and personal income reporting obligations in Canada for the employee.

Payroll Withholding Obligations in Canada

Canadian law requires the payer of remuneration (irrespective of whether the payer is a resident or non-resident of Canada) to withhold and remit Canadian income tax under Regulation 102 in respect of Canada-source wages earned by non-resident employees. Technically, the U.S. EoR is the payer and should register with the CRA and comply with Canadian withholding obligations.

However, the following practical challenges might arise, posing a risk for Canadian entities employing U.S. EoRs:

• If the U.S. EoR does not comply with the Canadian payroll withholdings obligations, the CRA could challenge the nature of relations between the Canadian entity and a non-resident employee. If the employee-employer relationship between the Canadian entity and the non-resident employee is determined by the CRA, the Canadian entity could be liable for withholding, remitting and reporting Canadian taxes in relation to the Canada-source wages as a true employer.
• If the CRA cannot collect Canadian withholding taxes from the U.S. EoR, it may assess the Canadian entity on the basis that the employment costs are effectively borne by it.

The CRA has not yet issued any specific guidance on U.S. EoR arrangements. When a Canadian business is considering entering into a U.S. EoR arrangement and the non-resident employee is expected to have some workdays in Canada, the Canadian businesses should consider:

• Assessing whether utilising an EoR is optimal in each case scenario
• Reviewing the contract with the U.S. EoR to confirm that there are provisions regarding foreign tax withholding and reporting obligations (if any)
• Applying for a Non-Resident Employer Certification or treaty-based waiver when applicable.

For more information on the tax implications of hiring U.S. employees through an EoR, please reach out to your BDO contact person or the author of this article.

Nadiia Pehlivan
BDO in Canada