Your employees are working remotely – but are you paying them properly?

As of Jan. 1, 2024, the Canada Revenue Agency (CRA) has a new administrative policy when it comes to determining an employee's province or territory of employment (POE).

This concerns employment income such as salaries, wages or commissions for the purpose of CPP/QPP, EI, QPIP and income tax deductions.

“The updated guidance is actually really helpful in terms of providing a better framework for remote workers,” says Maggie Carmichael, an associate at Blakes in Toronto.

“I think that this is something that employers have been looking for, for quite a while, especially coming out of the pandemic… in terms of helping employers address remote workers from a payroll perspective, which I think was always a little bit confusing.”

The government’s new guide is as clear as we could hope in the circumstances, says Matthew Demeo, partner at DLA Piper in Toronto.

“There's never going to be a one-size-fits-all answer so the guidelines, I think, try to take into account the different work arrangements and unique ways in which organizations operate, across a variety of different industries.”

Determining employer’s establishment

An employer’s establishment is any place or premises in Canada that is owned, leased or rented by this employer where employees report to work or from which employees are paid. For purposes of the POE, this does not need to be a permanent physical location, according to the CRA.

The POE is determined by: the type of income; the residency status of the employee; and the establishment of the employer where the employee reports for work.

The employee is considered to be reporting for considered work at an establishment of the employer if one of the following applies:

• The employee reports for work physically at the establishment.
• Where a full-time remote work agreement was made, the employee can be reasonably considered "attached to an establishment of the employer."  There is no minimum amount of time the employee has to report to that place.

Generally, the CRA considers a full-time remote work agreement to exist when:

• the agreement is either temporary or permanent
• the employer directs or allows employees to perform their employment duties full-time (100%) remotely
• the employment duties are to be performed at one or more locations that are not establishments of the employer.

Understanding what’s meant by employer’s ‘establishment’

A permanent establishment can be a temporary, physical office space, says Carmichael. It could also be where an employee has the authority to contract on behalf of the business.

“Say a sales employee is located in Manitoba, and they have some stock or merchandise or they have the authority to enter into contracts on behalf of the employer — even though they're a totally remote employee, they might still constitute a permanent establishment of the employer in that province,” she says.

“So there's a little bit of nuance there in terms of what constitutes a permanent establishment. I think that's one of the key things that an employer has to keep in mind when conducting the payroll analysis.”

And if an employer is fully remote, with no physical office space, the analysis of permanent establishment would relate mostly to where the company's head offices is in its governing documents, or where it's registered offices are, such as an address, says Carmichael.

If the entire workforce is 100% remote, including employees and managers, without any sort of physical location other than perhaps a mailbox that receives mail, “there could be perhaps some issues there when trying to weigh the factors properly,” says Demeo.

CRA indicators for ‘attached to an establishment’

To determine if the employee is reasonably "attached to an establishment of the employer,” all of the facts relevant to the employee's situation must be considered, says the CRA, which uses two indicators:

Primary indicator: The primary indicator is whether the employee would physically come to work to do their job at that establishment, if not for the full-time remote work agreement.

For employees who physically reported to an establishment of the employer immediately before working remote full time, that establishment is the one to which they would be reasonably considered to be attached, unless there’s a change to the employee's circumstances or job.

Secondary indicators: The secondary indicators to determine the establishment of the employer where the employee would physically come to work — if not for the full-time remote work agreement — are where:

• the employee attends or would attend in-person meetings, through any type of communication
• the employee receives or would receive work-related material or equipment or associated instructions and assistance
• the employee comes or would come in-person to receive instructions from their employer regarding their duties, through any type of communication
• there is someone responsible for or who supervises the employee, as indicated in the contractual agreements
• the employee would report based on the nature of the duties performed by the employee.

Questions to ask to determine POE

“Prior to this new CRA guidance, if an employee was 100% remote for payroll tax purposes and purposes of deduction, it would be based off of the location of the employer's establishment in Canada, from which the worker was paid,” says Demeo.

For example, if someone worked remotely in British Columbia, they were paid out of their employer's establishment in Calgary, with Alberta deductions.

“But now, based on the new guidance, if there is an establishment in British Columbia and the [employee’s supervisor] works out of the B.C. establishment, that would be the establishment for the province of employment, as opposed to the one that's perhaps where payroll was located, which might be in a different province.”

And if somebody was previously located in person at an establishment or worked hybrid, and now they're 100% remote, it would be the previous establishment that’s considered for the POE, says Demeo.

“But if the employee is hired as 100% remote, then that's where the factors come in. And so what they would look at is: What is the reporting relationship of the employee? For instance, where's their manager located, at what establishment? ...Is there perhaps a requirement to attend in-person meetings?... Where are they getting their employment-related tools — computer, phone, things like that? And, essentially, who's assigning the work for that individual?”

Reporting structure factored into remote payroll

If there's a fully remote worker in B.C. and the company has a permanent establishment in Ontario, the first indicator is where they would report to work if they physically had to go to work, says Carmichael.

“Where does the rest of their team sit? Does the rest of their team sit in Ontario? Or does the rest of their team sit in another province?

“And then you'd also look at the reporting structures of the business: Who are they meeting with? Even if they're virtual, and they have a virtual meeting, who are they meeting with? And where are they sitting? If there was a physical meeting, where would they attend? Where do they get their instructions from? Where would they have to attend to pick up materials?”

It’s also possible that a couple of different establishments could be involved, says Demeo.

“So then the final analysis would be which one is more appropriate in the circumstances? … Weighing all the factors together, which establishment would the employee be more attached to?”

Payroll takeaways for HR

Considering the new guidance, employers should be taking a more holistic look at their payroll practices, says Carmichael.

“This is a really good opportunity for employers to revisit their practices, not only for remote employees, but all employees, to make sure that they are allocating employees to provinces of employment for payroll purposes that align with the CRA policies, and whether any changes have to be made or not.”

If, for example, an employee is moving from Ontario to Alberta, it could be helpful for the employer to communicate the payroll information to the employee, she says, “so that they're aware that their source deductions will change, and they can make their own independent assessment on what they need to be doing to fulfill their tax liabilities at the end of the year.”

Overall, it’s about examining the work arrangement of those 100% full-time remote workers, says Demeo, “and just making sure that the payroll deductions being made are aligned with the indicators provided by the CRA and its new guidance.”

Employers might also want to make sure employee records, including personal addresses, are up to date, he says.

“Even during the pandemic, it wasn't uncommon for employees to move provinces or change addresses, perhaps without notifying their employer first, because they had been working 100% remote and thought they we're going to continue in that arrangement.”

The CRA guide also has an interactive feature with questions that might be helpful for employers, says Carmichael.

“The interactive questions could be very helpful for employers in starting their analysis on these types of issues — but there are there are some intricacies that need to be considered.”