Payroll withholding obligations for non-residents
With the COVID pandemic coming to an end, international travel has become more frequent. We have seen an increased number of employees travelling to Canada for work in 2022, making this a good time to revisit the Canadian payroll obligations for employers who have sent or plan to send their employees to Canada.
Payroll withholding requirements
Every employer, whether resident of Canada or not, who pays salaries or other remuneration to either a resident of Canada or to a non-resident of Canada in respect of employment services rendered in Canada is required to withhold tax under Regulation 102 and remit it to the Canada Revenue Agency (CRA).
Remuneration is subject to deductions at source based on graduated rates. The required Canadian payroll source deductions consist of federal and provincial income tax, Canada Pension Plan premiums (“CPP”) and Employment Insurance premiums (”EI”). The employee is responsible for the income tax portions, and both the employee and the employer are responsible for the CPP and EI premiums.
Non-resident individuals are subject to income tax in Canada on income they earn in Canada (based on working days in Canada). If the individual performs employment duties while physically in Canada, they will be considered “employed in Canada” and will therefore be subject to tax in Canada on amounts earned while physically present in the country.
This withholding is required whether or not the employer or employees are ultimately taxable in Canada and applies from the first day the employee is in Canada.
Employees ultimately may not be taxable in Canada under various tax treaties signed between Canada and other countries. This payroll withholding requirement therefore would cause additional costs and administrative burdens for the employers. Under certain circumstances, employees may be exempt from the payroll withholding requirement.
Payroll withholding exemptions
Income Tax Payroll waiver
Non-Resident Employer Certification
The employer can apply for a non-resident employer certification (NREC) if it is a Qualifying Non-Resident Employer, that is, a resident in a country with which Canada has entered into a tax treaty. This certificate is a “blanket” waiver, which exempts all Qualifying Non-Resident Employees from Canadian income tax withholding.
A Qualifying Non-Resident Employee is an employee who
- Is a resident in a country with which Canada has entered into a tax treaty at the time of the payment;
- Is not liable to income tax in Canada under the tax treaty; and
- Either works in Canada for less than 45 days in the calendar year that includes the time of the payment or is present in Canada for less than 90 days in any 12-month period that includes the time of the payment.
The employer is still required to issue T4 slips if the qualifying non-resident employee’s Canadian income is over $10,000.
Regulation 102 Waiver
When non-resident employees do not qualify -- or no longer qualify -- under the NREC, the employees may still apply for the payroll withholding waiver under Regulation 102 if the employee is exempt from Canadian income tax under a tax treaty.
The employer can stop withholding income tax only after the CRA approves the NREC or Regulation 102 waiver.
Social Security Tax Exemption
CPP (and QPP – Quebec pension plan) contributions are exempt when a certificate of coverage is issued by the home country.
EI premiums may be exempt under certain circumstances.
Employers should be aware of the Canadian payroll withholding requirements. It is important to consult with BDO advisor well in advance of travel to Canada, as the employer should be prepared to take the following steps to be compliant:
- Register with the CRA (and Revenue Quebec if the non-resident employee will work in Quebec) and open a payroll account. This could take approximately 1-2 months.
- BDO to prepare payroll waiver application. This could take approximately 2-4 months.
Canadian payroll withholding should be remitted to the CRA (and Revenue Quebec if applicable) until the tax authorities approve the payroll withholding waiver.
Processing time varies depending on when the applications are submitted.