Canadian government’s response to international income tax issues raised by COVID-19
The Canada Revenue Agency (CRA) has published guidance on international income tax issues raised by the COVID-19 crisis, and the CRA’s response. Many governments and businesses have put restrictions on travel (“Travel Restrictions”) which may inadvertently give rise to Canadian income tax issues.
The CRA guidance deals with the following key international income tax issues:
Individuals: Individuals are resident for Canadian tax purposes based on either a common-law factual determination or if they are physically present in Canada for more than 183 days. If an individual who was visiting Canada was unable to return to their country of tax residence due to the Travel Restrictions imposed, the CRA will not consider the common-law factual test of residency to be met because of that factor alone. In addition, it will also not consider the days during which an individual is present in Canada and unable to return to their country of residence solely as a result of the Travel Restrictions to count towards the 183-day limit for deemed residency, provided the individual returns to their country of residence as soon as they can do so.
Corporations: Under the Canadian income tax system, corporations that have been established under foreign law will be considered resident in Canada if their "central management and control" is located in Canada. This can include many factors including where board of director meetings are held. If the Travel Restrictions have prevented directors from attending board meetings outside of Canada, and instead have participated in board meetings while present in Canada, the question of whether the CRA would consider the corporation's central management and control to be in Canada will depend on tax treaty provisions:
- If the corporation was created under the laws of the United States as a "C-corporation" or "S-corporation", the CRA expects that the corporate residency tie-breaker rule contained in Article IV of the Canada - United States Income Tax Convention will address this issue.
- If the relevant tax treaty contains a residency tie-breaker rule based on the corporation's place of effective management, the CRA will not consider the corporation to become resident in Canada solely as a result of participation in a board meeting in Canada due to the Travel Restrictions.
- The position involving potential dual residency with non-treaty countries will be determined on a case-by-case basis.
The CRA will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees who regularly work outside of Canada perform their employment duties in Canada as a result of the Travel Restrictions being in force.
The CRA will also not consider an "agency" permanent establishment to have been created for the non-resident entity solely due to a dependent agent concluding contracts in Canada on behalf of the non-resident entity while the Travel Restrictions are in force, provided that such activities are limited to that period and would not have been performed in Canada but for the travel restrictions.
In determining whether an individual meets the 183-day presence test in a "services permanent establishment" provision of Canada's tax treaties, the CRA will exclude any days of physical presence in Canada due solely to Travel Restrictions. This provision is present in the tax treaty between Canada and the US, as an example.
US resident employees: Where US residents are present in Canada, and are exercising their employment duties in Canada solely as a result of the Travel Restrictions, the CRA will not count days in Canada toward the 183-day test in the Canada-United States income tax treaty. Such individuals will therefore continue to benefit from treaty relief under the Canada-United States income tax treaty. Having said that, the non-resident employer may still be responsible for source deductions and related reporting for US residents as outlined above. See Waiver Requests below.
Other resident employees: The CRA will take this same approach in applying the days of presence test in Canada's other tax treaties.
Canadian resident employees:
Where Canadian residents employed by a non-resident entity to work outside of Canada are forced to perform some duties in Canada on an exceptional and temporary basis due to the Travel Restrictions, and they have a letter of authority from the CRA applicable to the tax year including that period, the letter of authority will continue to apply, and the withholding obligations of the non-resident entity will not change in Canada as long as there are no changes to the withholding obligations of the non-resident entity in the other jurisdiction.
Requests to waive the withholding requirement in respect of payments for services rendered in Canada by non-residents (other than those paid in respect of an office or employment) - typically referred to as Regulation 105 (Reg 105), and remuneration paid to a non-resident officer or employee in respect of an office, or employment services - typically referred to as Regulation 102 (Reg 102), may be submitted electronically on a temporary basis, due to the interruption in processing as a result of the COVID-19 crisis and the Travel Restrictions.
Additionally, where the CRA has been unable to process a request within 30 days due to the interruption, it will not assess a person who fails to deduct, withhold or remit any amount required in respect of an amount paid to a non-resident person covered by the particular waiver request. The non-resident and the person paying the amount must otherwise fulfil their Canadian reporting and remitting obligations in respect of the waiver application.
The CRA will review other situations where a waiver request could not be submitted due to the travel restrictions or other consequences of the COVID-19 crisis, and no amounts were withheld, on a case-by-case basis.
The processing of requests for Section 116 Certificates for non-resident vendors who dispose of taxable Canadian property (TCP) has also been temporarily interrupted as a result of the COVID-19 crisis. TCP is generally real property or an interest in real property.
Where a certificate has not been issued by the time a purchaser's remittance is due (i.e., within 30 days after the end of the month in which the property was acquired), the purchaser or vendor may ask the CRA to provide a comfort letter advising the purchaser, vendor or representative to retain funds withheld until the CRA’s review is complete.
For information on additional Canadian COVID-19 relief measures, please contact: