Under Canadian tax rules, non‐resident companies who send their employees to Canada are required to comply with a substantial administrative burden. This applies even if the employee is in Canada for a relatively short period of time.
This compliance burden applies even if the employee would otherwise not be subject to personal tax in Canada on those earning (because the employee resides in a country with which Canada has a Tax Treaty).
The Canada Revenue Agency (CRA) expects non‐resident employers to register and obtain a number with them so that as employers they can remit the appropriate withholding tax. As well, the individual employee must obtain an identification number from CRA. The employee is then expected to file a Canadian personal tax return claiming a refund of payroll taxes withheld on the basis that he or she is entitled to relief under a Tax Treaty.
There is the ability for employers to obtain waivers to not withhold. However, the waiver has to be applied for in advance in respect of specific employees and is only for a specific period of time. This has proven to be inefficient and cumbersome and it is only available on an administrative basis which has often led to arbitrary results.
In the Federal Budget handed down on April 21, 2015 the Federal Government proposes to enact legislation that would ease this burden by eliminating the requirement to withhold if the “qualifying” employee:
The non‐resident “qualifying” employer must be resident in a treaty partner country and must not itself have a permanent establishment in Canada during the fiscal period that includes the time of the payment. The “qualifying” employer will have to obtain certification from the CRA in advance of any payments to employees.
This measure will take effect for payments commencing in 2016. The employer will continue to be responsible to issue tax slips (T4s) with respect to amounts paid to its employees. Employers will continue to be liable for any withholding in respect of non‐resident employees subsequently found to have not qualified for this exemption. However penalties should not apply if the employer can establish that they had made reasonable inquiry of the employee at the time the payment was made.
This insight was provided by Stan Zinman, Tax Partner at BDO Canada LLP. Weichert is a BDO Alliance member.