Know obligations, tax conventions for compliance
The global marketplace is seeing a rise in the number of frequent international business travellers who sometimes fly under the radar of senior management and human resources.
As businesses become increasingly global, it’s not uncommon to see foreign employees as part of a Canadian business team as a project progresses. Frequent international business travellers into Canada pose income tax and social security risks to both themselves and their employers, if there is a lack of compliance with the Canadian employment tax rules.
Non-compliance with employment tax rules may be a result of the employer and employee not knowing the Canadian income and employment tax requirements. There is a host of things to know about Canadian withholding, remitting and reporting for employees who frequently work in Canada, but reside in a foreign country and get paid by a foreign employer.
Know the obligations
Remuneration paid to non-resident employees who provide services in Canada is subject to the same income tax withholding, remitting and reporting obligations as for Canadian resident employees. Employers also have a responsibility to determine Canadian social security, employment insurance, workers' compensation and other provincial employment tax obligations.
These obligations also apply to non-resident businesses with either resident or non-resident employees working in Canada. The foreign employer needs to establish a Canadian payroll and obtain a business number from the Canada Revenue Agency (CRA). Alternatively, a related Canadian business may act as an agent of the foreign company for payroll purposes.
A company’s biggest obstacle seems to be identifying its frequent business travellers. This is not an easy task, since these cross-border employees may not come into contact with either the Canadian or foreign HR department.
This may occur when a project manager in Canada needs a few more resources to deliver on a commitment and calls the U.S. counterpart to get a team on site the next day for a month or so.
Gather the right information
Once the cross-border employees have been identified, the next step is to gather information to determine how frequently each employee is travelling to Canada on projects and meetings annually.
The amount of remuneration subject to tax in Canada is generally determined on a proration of salary or wages earned, based on the number of workdays in Canada as a proportion of workdays in the year. The employee’s wages can be paid by the home country, some allowances and per diems can be paid by Canada, and other items, like housing, can be paid or provided by a third party, like a relocation company. Yet another option is that accounts payable may be making payments as part of an expense reimbursement.
Then there are tax preparation fees. And if the employer is subsiding any additional taxes because of cross-border work, then tax reimbursements must be considered. Last but not least, equity compensation that would in part be taxable in Canada years after the employee has left the country is also a possibility. Compensation accumulation is a major project when you have cross-border employees.
Cross-border tax conventions
The next step is to determine whether employment income earned in Canada may be exempt from taxation pursuant to an income tax convention between Canada and the employee’s home country. The employer will have to examine the various criteria of the applicable convention to determine if the remuneration earned here may be exempt from Canadian taxation.
When looking at a convention, consider if the employee is working in Canada for less than 184 days in a period; if the payment being made to the employee is paid by or on behalf of a resident of Canada; or if the remuneration earned in Canada is borne by a permanent establishment in Canada or is there a cross-charge to Canada.
Terminology plays an important part in analyzing the applicable tax conventions. In some tax conventions with Canada, period means calendar year. In others, period refers to the taxation year or any period of 12 months beginning or ending in the calendar year.
That said, if an employee is exempt from taxation on the employment income they earned in Canada, they can request a tax deduction waiver to reduce their employer's required Canadian income tax withholding (note that Quebec has a separate process).
It's also important to review the social security agreement, if any, between Canada (Quebec has its own) and the respective foreign home country, and obtain an exemption from Canadian/Quebec social security contributions where possible. There could be significant savings if there is an agreement in place and the exemption criteria are met.
T4s, SINs and TINs
What happens if a non-resident's income is taxable in Canada? It may be difficult to calculate and remit the income tax withholdings if the employee works in Canada on a sporadic basis. In these cases, the employer may consider remitting income taxes based on estimated employment income to be earned in Canada during the respective pay period. These calculations can be reviewed monthly once actual travel information is available. Many employers don't realize that even if the individual is exempt from Canadian tax, they must still issue a T4 for the Canadian-source taxable income.
Employees have responsibilities too. Every employee needs a social insurance number (SIN) to work in Canada. If someone does not have a valid work visa and thus is not eligible for a SIN, they need to apply for a taxpayer identification number (TIN).
Once the SIN or TIN is obtained, employees need to provide it to the employer. The employer is responsible for making a reasonable effort to obtain a SIN/TIN, as the employer may be penalized if one is not obtained.
Regardless of residency status, any employee receiving salary, wages or other remuneration for performing services in Canada is required to file a Canadian income tax return by April 30 of the following taxation year. If the income is exempt under a tax treaty, the employee should file a return even if no taxes are payable.
In cases where an employer has a non-resident employee and has not remitted any taxes, the employer could be responsible for paying 100 per cent of the employee’s taxes, since it may be easier for the CRA to get the employer to pay rather than the employee.
Financial risks are not the only exposures. Frequent business travellers may create a permanent establishment for corporate tax purposes in places where one is not wanted. There could also be reputational risk, both internal and external, if it becomes apparent that an employer knowingly does not comply with the tax laws.
An employer should ensure it has a policy and process in place so it can track the activities of frequent international business travellers.
Employment tax rules are very complex and the employer may need an external tax service provider to help ensure compliance.
