November 2018
Companies now prefer to send their employees on short-term assignments due to the increase costs associated with long-term assignments. A short-term assignment could be anything less than one year and the movement of those employees into a jurisdiction like Canada can create a myriad of potential payroll tax issues for the foreign employer.
With the increased number of employees on short-term assignments into Canada, foreign employers must be diligent in maintaining visibility and documentation of their employees. The prolonged presence in foreign jurisdictions, such as Canada, may create potential corporate tax issues.
Within the current political climate in many countries, it is in vogue to ensure that foreign employers and/or non-resident employees are compliant with the country’s tax rules and regulations. The Canada Revenue Agency (CRA) are continuing to increase their enforcement of the tax law by increasing their audits. This increased audit activity, by extension, creates, what is referred to as the “spillover” effect. This spillover occurs where, through the audit of a Canadian company, the auditor identifies a “potential” new company to audit. It is usually at this time where the foreign company is identified and a payroll audit begins.
We have outlined below the issues that the foreign employer must consider with their short-term employees as it relates to Canadian payroll tax requirements (along with the penalties for non-compliance), so that the foreign employer is compliant with the Canadian tax law regardless of whether or not the spillover audit occurs.
The following must be taken into account:
It is important to note that in most cases, the non-resident employee, through the utilisation of an existing tax treaty, may not even be taxable in Canada. Regardless of that ultimate outcome, Canadian tax law requires that the foreign employer withhold the appropriate income tax and source deductions.
However, these withholding requirements could certainly create undue delay and additional costs for their Canadian based projects. As a result, there are certain processes that, if followed, may remove the foreign employer’s need to “pay” these particular taxes, which we have described below.
Canada Pension Plan
Canada has entered into many Totalization Agreements with foreign countries. It is imperative to review the Totalization Agreement that exists between your country and Canada. Should the agreement exist, there is normally a requirement to obtain a Certificate of Coverage (CoC). The CoC should remove the requirement of the short-term non-resident employee to contribute to a Canada Pension Plan (CPP) and should, at the same time, remove the corporate requirement. In some cases, where a CoC is not obtained, Canada would generally require continued deductions both at employee and employer levels.
Employment Insurance
Although each Totalization Agreement may wade into the subject of other benefits like Employment Insurance (EI), there is no formal and separate country-to-country agreement in existence and the potential still may exist for a required Canadian EI payroll deduction. Consequently, we would recommend that in addition to verifying the Totalization Agreement that you will need to determine whether your country has an EI style deduction/contribution vehicle similar to that of Canada’s. With the understanding that the short-term non-resident employee continues to contribute, then it may be probable that no deduction related to EI will be required from the employee and employer.
Income tax
As previously mentioned, the short-term non-resident employee may be exempt from Canadian income tax under a tax treaty that Canada has with the employee’s home country. This particular position must be disclosed and approved by CRA in advance of the short-term non-resident employee’s first pay, otherwise, the payroll and source deductions are required at that time. In order to obtain approval from CRA, the short-term employee must file Form R102-R, Regulation 102 Waiver Application, within at least thirty days prior to providing service in Canada. Only at such time that the approved waiver has been received by the foreign employer, then and only then will the foreign employer be able to cease withholding and remittance for income tax.
Non-Resident Certification programme
With continued feedback from the professional community representing these foreign employers and, by extension, the employees, the CRA revisited their waiver application process in order to expedite the approval process and to reduce paperwork. Consequently, the Non-Resident Employer Certification program was set in place.
Once the foreign employer application has been accepted into the Program, the CRA will remove the foreign employer’s obligation for income tax withholdings for those employees who are considered “qualifying non-resident employees. In addition, there is a requirement of the non-resident employer to continually track their employees and their days of presence in Canada. Where the non-resident employees’ stay in Canada exceeds specific thresholds, the individual employee may then have to apply for a separate tax waiver. In some limited instances, it is possible that there will not be a requirement for any income tax withholding, no Form T4, Statement of Remuneration Paid, nor any Canadian income tax filing by the employee.
It is important to note that that acceptance into the Non-Resident Employer Certification program assists with the waivers of the income tax, it may remove the requirement to issue T4 slips along with the requirement for the non-resident employee to have to file a Canadian tax return. However, acceptance into this program does not impact the requirements related to the source deductions (i.e. CPP / EI) previously addressed.
T4 Statement of Remuneration Paid
As the short-term non-resident employee is performing services in Canada, the foreign employer will be required to issue a Form T4, Statement of Remuneration Paid slip. This document will report the employment income and related income and source deductions from the calendar year. The T4 Information Return (T4 Summary and all related T4s) must be filed to the CRA prior to the end of February following the year of assessment.
TD1-Personal Tax Credits Return (and related provincial document)
Short-term non-resident employees are required to complete this document, prior to the commencement of services in Canada and return to their employer to identify the applicable credits and to assist in the determination of the income tax to be withheld, should the individual not have received a waiver.
Social Insurance Number
In order to file the applicable forms mentioned above (i.e. T4, Tax Waivers etc.), where the short-term non-resident employee has arrived in Canada on a valid work permit, the foreign employer should instruct the individual to obtain a valid Canadian Social Insurance number.
Potential Payroll Penalties
Where the foreign employer has failed to comply with the Canadian required payroll withholding, the penalties are steep as shown below:
Failure to deduct
Failure to Remit
if you are assessed this penalty more than once in a calendar year, CRA will apply a 20% penalty on the second or later failures if they were made knowingly or under circumstances of gross negligence
Information Returns
Over the past number of years, CRA has undergone a seismic shift in their audit approach with foreign employers and their payroll obligations. The days of complying with the payroll tax law, once you reached either a volume of employees, income threshold, or the number of days of presence are in the distant past.
CRA has increased their audit reviews, and with the added spillover, is able to identify non-compliant foreign employers relatively quickly. As noted above, the penalties are severe and since the foreign employer would be non-compliant, there is relatively little opportunity to combat the penalties so the audits are quickly closed. Again, the law is clear, in the absence of a waiver, you must withhold.
We recommend that foreign employers keep the lines of communication open (i.e. HR to Corporate Tax to Tax Advisor etc.) in order to identify the issues and to mitigate any problems as soon as possible.
Debra Moses
dmoses@bdo.ca