Expatriate tax issues raised by the COVID-19 crisis
This article addresses several important Canadian expatriate and cross-border taxation issues that may arise as a result of the COVID-19 crisis, for both the employee and the employer.
The COVID-19 crisis has resulted in the enactment of safety measures by governments around the world to protect the health of their citizens. Similarly, businesses have imposed safety measures to protect their employees.
The Canada Revenue Agency (CRA) has released general guidance with respect to certain tax issues that may arise from travel restrictions, but ultimately indicated that these issues would be reviewed on a case by case basis. Nonetheless, the complexity of these issues raises important questions with respect to potential tax consequences to the individual or their employer.
Individual tax residency
In general, an individual's residency for Canadian tax purposes is a factual determination based on the individual's residential ties to Canada. In addition, an individual who temporarily stays or ‘sojourns’ (is physically present) in Canada for a period(s) totaling 183 days or more in a tax year will be deemed to be resident in Canada throughout the year.
Potential issues arise when an individual, who was visiting Canada before the travel restrictions were imposed, is unable to return to their country of tax residence, and instead had to stay in Canada.
Could this extended stay in Canada result in the individual being resident in Canada for Canadian tax purposes? Similarly, what are the implications if an individual who was regularly residing in a foreign location voluntarily returned to Canada due to the pandemic?
Corporate tax and permanent establishment
Under the Canadian tax system, corporations that have been established under foreign law are considered resident in Canada if their central management and control is located in Canada. One of the key factors typically considered in applying this concept is the jurisdiction in which the meetings of the board of directors take place.
Consider the implications when a corporation that is tax resident in a foreign jurisdiction has one or more directors present in Canada before the implementation of the travel restrictions. The travel restrictions might have resulted in these directors being unable to travel to the foreign jurisdiction to attend board meetings.
If directors of a foreign corporation participate in board meetings while physically present in Canada, will the CRA consider the corporation's central management and control to be in Canada? Furthermore, will this (among other factors) create a permanent establishment in Canada?
Cross-border employment income
Many individuals residing on either side of the Canada-U.S. border may be employed and perform their employment duties in the other country.
Under the Canada-U.S. income tax treaty, Canada taxes salary, wages and other remuneration derived by a resident of the U.S. for employment services rendered in Canada. Notwithstanding the above rule, such remuneration is not taxable in Canada if either of the following apply:
- The remuneration is not greater than CAD 10,000, or
- The person is present in Canada for no more than 183 days in any 12-month period, starting or ending in the fiscal year concerned, and the remuneration is not borne by either:
- an employer who is a resident of Canada, or
- a permanent establishment which the employer has in Canada.
Some U.S. residents who regularly exercise their employment in Canada and are normally not present in Canada in excess of 183 days (and for that reason are not taxable in Canada on their employment income) may now be exercising their duties in Canada for an extended period of time as a result of the travel restrictions.
A similar situation may arise for Canadian residents working in the U.S. who, as a result of the travel restrictions, perform their employment duties in Canada for an extended period of time.
In these situations, will the employees' taxability in Canada be affected? Furthermore, how will the performance of employment duties from Canada affect the payroll withholding obligations of an applicable non-resident entity?
Canadian non-resident waivers
Canadian income tax rules require that amounts be withheld and remitted to the CRA. In certain circumstances, an application to the CRA may be made for a waiver of this withholding requirement. Most often, this will be the case if a recipient is ultimately exempt from Canadian income tax in respect of a payment because of an income tax treaty.
There may be concerns when waiver requests are not processed timely by the CRA - in particular, before the first intended payment date – as a result of the COVID-19 delays and travel restrictions.
Will the CRA assess a person who fails to deduct, withhold or remit any amounts as required in respect of an amount paid to a non-resident person covered by pending waiver requests?
Non-resident employer certification
Under the non-resident employer certification, there is an exception to the employer's withholding obligation for certain non-resident employers. These non-resident employers will not have to withhold and remit tax on the payments they make to a qualifying non-resident employee who is working in Canada for a limited time and is exempt from tax in Canada under a tax treaty.
Potential issues arise when an individual physically working in Canada as a qualifying non-resident employee may not have been able to leave Canada since travel restrictions were imposed.
Could this extended stay in Canada result in the individual losing their status as a qualifying non-resident employee, and obligate the qualifying non-resident employer to withhold and remit Canadian payroll deductions?
For further guidance on expatriate tax issues
If you or someone you know is affected by one of the situations above, and you are in need of guidance or further advice with respect to the questions raised, please contact -