If a non-resident employee performs duties of employment in
Canada, the employer must deduct and remit source deductions made on account of
income tax. This is the case even if the
employee’s salary is expected to be exempt from Canadian taxation by virtue of
a tax treaty between Canada and the non-resident employee’s home country. If the employment income is exempt from
Canadian tax under a treaty, the employee pays tax on the income in the
employee’s home jurisdiction but must file a tax return in Canada in order to
claim a refund of the source deductions withheld from his or her paycheque.
This source deduction requirement applies whether the
non-resident employee works in Canada for a foreign employer or a Canadian
employer.
To avoid the source deduction requirement, the non-resident
employee (not the employer) must
apply to the Canada Revenue Agency (the CRA) for a waiver from the source
deduction requirement. If granted, the waiver
applies on an employee-by-employee basis and applies for only a specific period
of time. This makes for an inefficient
system.
In an attempt to address this administrative issue, the 2015
budget proposes a statutory exception to the normal source deduction
requirement for salary paid by qualifying non-resident employers to qualifying
non-resident employees. The statutory
exception will apply for salary paid after 2015.
A non-resident employee will qualify for the exemption from
source deduction requirements if the employee
- is exempt from Canadian income tax under a tax treaty between Canada and the home country of the employee; and
- is not physically in Canada for more than 89 days in any 12-month period that includes the time of the salary payment.
A
qualifying non-resident employer must be resident in a country with which
Canada has a tax treaty. If the employer
is a partnership, at least 90% of the partnership’s income for the fiscal
period that includes the time of the salary payment must be allocated to
persons that are resident in a treaty country. In either case, the employer must not carry on
business through a Canadian permanent establishment and must be certified by
the CRA.
This new statutory
exception will not cover all cases in which the employment income is likely to
be exempt from Canadian income tax. Most
of Canada’s tax treaties provide an exemption for Canadian employment income
earned by a non-resident if the employee is present in Canada for no more than
183 days. As noted, the employee must be
present in Canada for no more than 89 days in order to obtain the source
deduction exemption. As a result, at
least some non-resident employees will still have to apply for the waiver.
The source
deduction exception does not apply if the employer is resident in
Canada. This likely means that foreign
employees on very short-term Canadian assignments (less than 90 days) will
remain employed by a foreign employer.
Only foreign employees who are likely to be in Canada for 90 days or
more will end up being seconded to a Canadian affiliate of the foreign
employer.
Even if not
required to make source deductions, a qualifying non-resident employer will
continue to be responsible to file information slips with the CRA reporting all
income paid to non-resident employees.