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Tax Law – Patrick Westaway 

Those who sell goods or services in Canada have always to consider whether to become a ‘registrant’ under Canada’s federal Excise Tax Act. For residents of Canada, the issue is simple. If revenues from the sale of goods or services in Canada that became due in the four preceding calendar quarters exceed CDN$30,000.00 then registration is required unless, in broad terms, an exemption can be found. Unfortunately, matters are considerably more complicated for non-residents of Canada.

Overview of Canada’s Sales Tax System

By way of an overview, Canada has both federal and provincial levels of sales tax. The federal sales tax is referred to as the Goods and Services Tax (“GST”) whereas sales tax at the provincial level is generally referred to as provincial sales tax (“PST”)—except in Quebec, which refers to its sales tax as QST. In the provinces of Ontario, Nova Scotia, New Brunswick and Newfoundland & Labrador, the administration of GST and PST has been combined and the result referred to as Harmonized Sales Tax (“HST”). British Columbia had adopted the HST but reverted to its old PST system as of April, 2013. For simplicity’s sake, this article refers throughout to GST but such comments apply equally to HST.

GST applies at a rate of 5% of the value of the consideration for the supply, i.e., the sale price. The various PST rates range from 5% to 10% and, in non‐HST provinces, is variously applied to the net or gross sale price (sale price with or without GST). In Ontario, the total HST is 13% (GST of 5% plus PST of 8%). Tax advice should be obtained to determine whether and at what rate sales tax applies in given circumstances.

A key element of this federal system is a set of rules—known as the “place of supply” rules—to determine which province has jurisdiction to tax a given transaction. Simply stated, the province with jurisdiction is generally the one in which the supply occurs. If, for example, the goods supplied are tangible personal property then the relevant province is generally the one in which the goods are delivered or made available to the recipient. If the supply is of real estate then the relevant province is generally the one in which that real estate is located. If the supply is of intangible personal property, jurisdiction will depend on a number of factors, including the place in which the property can be used and the location of the purchaser. Different intangible properties will, however, be subject to different rules. When services are supplied, the relevant province is generally determined according to the home or business address of the purchaser, although, again, specific rules apply for certain types of services. The place of supply rules are extensive and the above examples are general and for illustrative purposes only.

When property and services are brought into an HST province from another province (whether or not such other province is also an HST province) or from outside Canada for consumption, use or supply in that HST province, the supplier is required to self‐assess since no actual purchase and sale occurs.

Significance of being a “registrant” under Canada’s Excise Tax Act

So what is the significance of being a registrant? A registrant is required to withhold and remit GST on supplies made in Canada of goods and services (provided that no exemption is available) and to file periodic GST returns. On the other side of the ledger, a registrant is entitled to claim input tax credits for (deduct) any GST paid or payable by it on taxable supplies (inputs) that are used, consumed or supplied in the course of its commercial activities. The policy behind input tax credits is that GST should only be paid by consumers, not each party in the supply chain. Consequently, to the extent that the registrant’s commercial activities involve the making of “exempt” supplies, (supplies that are not subject to GST) input tax credits are not available. Perhaps inconsistently, “taxable” supplies includes “zero‐rated” supplies (supplies that are taxable at a rate of 0%) and supplies that are made outside Canada (to which GST does not apply). Input tax credits can only be claimed if the taxpayer (including non‐residents) keeps documentation sufficient to determine the amount of GST that it paid on its inputs. This documentation is, to some extent, prescribed by regulation and varies according to the cost of the particular input.

Registration requirement as it applies to nonresidents

To return, then, to the original question, when is a non‐resident required to become a registrant? A non‐resident is generally required to become a registrant under the Excise Tax Act if it carries on business in Canada. In making this determination, the Canada Revenue Agency (the “CRA”) claims a broad discretion unfettered by any clearly articulated rules. Instead, the CRA has published various scenarios, each with a lengthy set of circumstances, and expressed an opinion in each instance. It is left to non‐residents and their tax advisors to discern patterns among these scenarios and findings.

In the context of non‐residents selling goods worldwide, for example, the CRA emphasises the solicitation of orders and delivery of goods in Canada. Yet these factors alone are insufficient to find that the non‐resident carries on business in Canada. Something more is always required. That something more may be the place of contract, which itself can involve subtle legal analysis, or the warehousing of goods in Canada.

Other factors, such as a Canadian bank account will be considered but are less significant.

Interestingly, the CRA has indicated that it does not consider it relevant that a non‐resident who sells machinery into Canada also sends its employees into Canada to install that machinery. Such activity is regarded as being merely ancillary to the sale. One must be careful when relying upon such statements, however, since there may well be situations in which the time required for the installation or the amount of the purchase price allocable to such installation services would draw a different response from the CRA. Each situation must be carefully considered in view of its own circumstances.

In addition to the foregoing considerations, special rules require non‐residents to register for GST in the following circumstances, subject, as always to qualifications and exceptions:

  • a non‐resident sells admissions to a place of amusement, seminar or other activity or event in Canada, including concerts and sporting events;
  • a non‐resident sells books, newspapers or periodicals in Canada;
  • a non‐resident organises a convention in Canada; or
  • a non‐resident exhibitor at a convention in Canada brings into the country goods for sale to delegates.

In general, registration must occur before the thirtieth day following the day on which the taxable supply is first made in Canada. Non‐residents who sell admission to a place of amusement, seminar or other activity or event, however, must register before the taxable supply is made.

Conclusion

In view of the foregoing, non‐residents who intend to sell goods or services in Canada should always consult their Canadian tax advisor in advance and, ideally, before finalizing the services or sales agreement. Registration obligations, whether for tax or other purposes, the effects of such registrations and even applicable tax rates are of sufficient complexity that proper advice is always essential.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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Tax Law – Patrick Westaway

Multinational business requires multinational tax planning, for employees as well as employers. When sending employees abroad, it is generally up to the employer to minimize the employees’ foreign taxes and to ensure that all foreign taxes are paid and filings made. The following briefly describes the tax issues to be addressed when transferring or seconding employees to Canada.

What are the thresholds below which nonresident employees are not taxable in Canada?

The general rule under Canada’s typical tax treaty is that a non‐resident employee is exempt from Canadian income tax if three conditions are met:

(i) the employee is present in Canada for no more than 183 days in any 12‐month period beginning or ending in the fiscal year concerned;
(ii) the employee’s remuneration is paid by or on behalf of an employer who is not a resident of Canada; and
(iii) the employee’s remuneration is not borne by a Canadian permanent establishment of the non‐resident employer.

183 days

On a strict reading, a non‐resident employee could be subject to Canadian income tax for two taxation years because of time spent in Canada during a single 12‐month period. This situation arises because a single 12‐month period would frequently begin in one taxation year and end in another. It is, however, understood that the Canada Revenue Agency (“CRA”) would only tax a non‐resident for a single taxation year notwithstanding that the particular 12‐month period touches upon two.

This concept of a rolling 12‐month period was introduced by the Organisation for Economic Co‐operation and Development (OECD) in their Model Tax Convention with Respect to Taxes on Income and on Capital (“OECD Model Convention”). According to the OECD’s technical notes, the phrase “12‐month period beginning or ending in the fiscal year concerned” is intended to catch situations in which the employee’s time is allocated between taxation years. Canada’s treaties that include language similar to that introduced by the OECD Model Convention include those with the U.S., France and Germany. Under Canada’s treaty with the U.K., the criterion refers to “183 days in the calendar year concerned”. A U.K. resident could therefore be exempt from Canadian income tax despite being present in Canada for 364 consecutive days if the 182nd day were December 31st.

“Employer”

Canada’s treaty with the U.S. differs from its treaties with other countries, including the U.K., France and Germany, by substituting “person” for “employer” in the second criterion. Under the U.S. treaty, then, it is irrelevant whether the Canadian‐resident payor is the employer. If a non‐resident employee exercises its employment in Canada and is paid by or on behalf of a person resident in Canada then that employee will be subject to Canadian income tax.

Under Canada’s other treaties, such as those with the U.K., France and Germany, the employee is taxed in Canada if the Canadian‐resident payor is the employer. Whether a person is an “employer” is determined under the domestic laws of the source country.

Canada’s laws in this regard apply a substance over form approach. If a Canadian resident is the employer in fact then the employee will be taxable in Canada notwithstanding formal documentation to the contrary.

“Borne by”

The third criterion applies to situations in which the non‐resident employer allocates the cost of the employee’s remuneration to a Canadian branch. If the branch deducts the amount of that remuneration from its taxable Canadian income then the branch is considered to have “borne” that cost and the exemption will not be available.

De minimus exemption

Canada’s treaty with the U.S. also differs from its treaties with other countries by providing a de minimus exemption: if a non‐resident employee’s remuneration in respect of employment exercised in Canada is CDN$10,000.00 or less in a given calendar year then that employee is not subject to Canadian income tax. Unfortunately, this exemption is not available to residents of Germany, the U.K. or France.

What are the employer’s withholding and remittance obligations?

Employers are required to withhold and remit Canadian income tax regardless of whether a treaty exemption applies. If, however, a treaty exemption is available, the employee or the employer (with the employee’s authorization) may apply for a waiver. The waiver application should be made 30 days before employment in Canada begins and must provide information as to the applicability of the treaty exemption relied upon, a copy of the employment contract and sufficient information or documentation to satisfy the CRA that the employee is resident in the treaty jurisdiction. If a waiver is made after remuneration is paid to the employee then the waiver will only apply to subsequent payments.

This waiver applies only to the employer’s withholding and remittance obligations. The employer is still legally required to open a Canadian payroll account with the CRA, to issue a T4 slip to each employee who comes to Canada and to file copies, together with a T4 Summary, with the CRA. The T4 slip is the document on which an employer reports to each employee the amount of their Canadian taxable income and the amount of Canadian income tax withheld and remitted. The argument for maintaining these obligations in the face of a waiver is that employees must have their T4 Slips to file with their Canadian income tax returns—which, the CRA submits must be filed notwithstanding that no Canadian income tax is payable and the penalty for failing to file would be nil.

Regarding social security payments, Canada’s social security agreements with other countries exempt non‐resident employers from the obligation to withhold and remit contributions to the Canada Pension Plan. In order to qualify for these exemptions, the period of the non‐resident employee’s employment in Canada cannot exceed specified time limits. In respect of employees resident in the U.S., the U.K. or Germany, the period of employment is not to exceed 5 years. Under the agreement with France, the period is 3 years.

Finally, premiums are not payable into Canada’s mandatory employment insurance program if premiums in respect of the employment exercised in Canada are payable under the unemployment insurance laws of the non‐resident employee’s home jurisdiction.

What are the employee’s filing obligations?

As stated above, non‐resident employees are legally required to file Canadian income tax returns regardless of whether the above waiver has been obtained. However, since the penalty for failing to file is calculated as a percentage of the tax owing, the penalty applicable to an individual for failing to file would be zero.

In the absence of a waiver, the issue for non-resident employees is the potential for double taxation until a foreign tax credit can be obtained the following year in the employee’s home jurisdiction. A typical solution is for an employer to pay the Canadian income tax on behalf of the employee. This creates a taxable benefit which in turn increases the tax liability, the tax paid by the employer and so, again, the taxable benefit. This circularity is addressed by “grossing up” the tax payment made by the employer by an appropriate percentage. The tax cost to the employer would therefore be greater than would otherwise have applied to the employee. A more cost effective alternative is for the employer to lend the amount of the tax to the employee. The loan would be repaid upon the employee’s receipt of the foreign tax credit in their home jurisdiction.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a full service law firm based in Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such as corporate tax planning, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, personal tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax planning practice.

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