It's not often clearly stated that the rules regarding province of employment do not apply to retiring allowances, or other taxable income subject to the lump sum method
By Alan McEwen
Everyone knows the importance of the province of employment.
Getting this right is fundamental to correctly calculating income tax source deductions, since these are in part based on income tax legislation specific to the province concerned. And, since the province of employment must be reported on T4s, reporting income for the wrong province is a failure to file this return as required.
The basic province of employment rules are quite well known. For employees who report to work at an employer's permanent establishment, the geographic location of that establishment determines the province of employment. Where employees don't report to work at an employer's permanent establishment, the province of employment is determined by the geographic location of the employer's permanent establishment from which employees are paid.
“Report to work” means physically presenting oneself, ready to start work. An employee who works out of a home office may not “report to work” in that sense. Where an employee reports to work may also be different than where employment services are performed. For example, some types of employees report to an office, from which they are then dispatched to various client locations. So long as these client locations are not permanent establishments of the employer, it's the place where employees get dispatched that counts — not where they actually end up performing services.
There are slight variations on what an “employer's permanent establishment” means but, in practical terms, it's almost impossible for an employer to carry on business somewhere without creating a permanent establishment at that place. The two principle exceptions are that carrying on business through a person who is not an employee and an office used solely to purchase merchandise do not, of themselves, create a permanent establishment.
However, it's not often clearly stated that the rules above do not apply to retiring allowances or other taxable income subject to the lump sum method. For such payments, jurisdiction for source deduction purposes is based on employee residence at the time of payment. For example, an employee may ordinarily live in Saskatchewan, but report to work at an employer's establishment in Alberta. For regular employment income, Alberta is the province of employment. But if a retiring allowance is paid, the correct jurisdiction is Saskatchewan.
You might ask why does this matter? The CRA lump sum rates for Alberta and Saskatchewan are both the same, after all.
Clearly, it does matter when the province of employment for T4 Box 14 income is different than the province of residence and one of these is Quebec. First there are two sets of CRA lump sum income tax rates: one set for Quebec and one set for all other jurisdictions. Second, Revenue Quebec source deductions may be required, if a retiring allowance is paid to a person when that person resides in Quebec.
The classic example always used in these situations is of an employee who lives in Gatineau, on the Quebec side of the Ottawa river, but reports to work in Kanata, on the Ontario side. For T4 Box 14 reportable income, Ontario is the province of employment. But for any retiring allowances paid, Quebec is the correct province. At its most extreme, this example implies that wages in lieu of notice and a retiring allowance, combined on a single payment, may have two different provinces of employment. Ontario, for the wages in lieu, and Quebec, for the retiring allowance.
This also has implications beyond the correct income tax source deductions. Starting with payments in the 2010 tax year, retiring allowances are now reported on T4s rather than T4As. One of the differences between these two is the province of employment is a field on the T4, but not on the T4A. CRA instructions are clear that payroll history for each province of employment must be reported on a separate T4. For example, it's well known that if an employee relocates, such that the employer permanent establishment to which she reported to work changed from a location in B.C. to a location in Manitoba, two separate T4s are required.
But what happens when an employee, who previously reported to work in Ontario, is terminated, relocates to Alberta and is a resident there when a retiring allowance is paid. Assuming YTD T4 reportable earnings for Ontario, the retiring allowance payment triggers the need for a separate T4, showing — in Box 10 — the retiring allowance allocated as income earned in Alberta.
It does not take a move to trigger this requirement for two T4s. The requirement also applies if the province of employment was not otherwise the employee's province of residence. For example, an employee's province of employment could be determined based on the province from which the employee was paid, yet live in another province. Similarly, an employee could physically reside in one province and report to work in another. In both cases, payment of a retiring allowance triggers the need for an additional T4.
Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (905) 401-4052 or visit www.alanrmcewen.com for more information.