Expatriates still employees when calculating health tax

Court decides IBM Canada remunerated employees overseas, even though foreign affiliate paid

Workers on temporary assignment are still considered employees, so their employers must pay employer health tax on remuneration. That’s what IBM Canada was told recently by the Ontario Court of Appeal.

The case concerns employees who take overseas assignments at one of the company’s affiliates. While there, they are referred to as expatriates by IBM and paid by IBM Canada, which is then reimbursed by the affiliate.

The Minister of Finance assessed the company under the Employer Health Tax Act, which imposes a tax on employers to fund the Ontario Health Insurance Plan on “total Ontario remuneration paid by the employer during that year.”

IBM Canada argued the expatriates were not its employees and they were not remunerated by the Canadian company. And in January 2007, the Superior Court of Justice said IBM Canada was not liable for the tax as the expatriates were employees but were not remunerated by IBM Canada.

However, on April 1, the Ontario Court of Appeal disagreed and allowed an appeal by the minister, saying, “IBM Canada and its expatriates remain in an employer/employee relationship while the expatriates are working abroad for foreign affiliates… I cannot agree that the monies paid by IBM Canada to expatriates do not constitute ‘remuneration paid’ for the purposes of the act. In my view, payments made by IBM Canada are caught by, and taxable under, the act.”

Detailed assignment letter

According to IBM’s documents, those who go on overseas assignments are “treated as employees of the work-location country… Such assignees remain employees of their home country… since they continue to be subject to the benefit programs, salary plans and applicable tax withholdings of their home country.”

These employees work exclusively for the foreign affiliate but are guaranteed employment with IBM Canada when the job is over. The terms and conditions of the assignment include:
•IBM Canada pays the expatriate’s base salary, bonuses and some allowances. These are deposited in Canadian funds by IBM Canada’s payroll department into the expatriate’s Canadian bank account.

•The expatriate’s salary is determined according to IBM Canada’s pay grid. If a salary freeze is in effect, this applies. Entitlement to merit raises is based on performance evaluations done by the foreign affiliate but the increase is based on IBM Canada’s salary band and payments are calculated according to its payout tables.

•The expatriate may be eligible to receive overtime payments based on IBM Canada’s compensation package.
•Only IBM Canada can terminate the expatriate for cause. If she is terminated due to downsizing, IBM Canada provides a severance package.

•The expatriate is covered by IBM Canada’s pension, medical and dental plans and is eligible to participate in IBM Canada’s stock purchase plan. Canada Pension Plan payments are also made for the expatriate.

The health tax is not tied to the use of OHIP services or to the place where employment services are performed, said the court. And “total Ontario remuneration” is that paid “from or through a permanent establishment of the employer in Ontario.”
Monies paid are taxable if there is an employee/employer relationship when the payment was made by IBM Canada and both before and after the assignment, the expatriate was “in every sense of the word an employee of IBM Canada,” he said. The assignment was temporary and for a fixed period. There was an obvious, close corporate connection between the foreign affiliate and IBM Canada.

IBM argued no services were provided by the expatriate to IBM Canada but the judge said the expatriate could feasibly provide services to IBM Canada and “presumably this assignment benefits IBM Canada.”

Even though the foreign affiliate bears the ultimate economic burden of the payment, IBM Canada still pays remuneration to the expatriate because the act looks to the nature of the payment as between the employer and the employee and not the source of the funds or any arrangement between a third party and the employer for reimbursement, said the court.
“The foreign affiliate’s roles as the ultimate bearer of the economic burden and the beneficiary of the services provided speak not to the nature of the payments made by IBM Canada but to whether IBM Canada remains in an employer/employee relationship with the expatriate.”

Deterrent to employers?

“Any company sending people out of the country on these temporary assignments — not an unusual arrangement — now face an additional expense, which isn’t necessarily helpful in this economic climate,” said Brendan Bissell, who represented IBM, in the Financial Post. “They’ll have to think if it’s really worthwhile to incur these extra costs.”

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