Minimizing the Income Tax Consequences of Sending Employees to Canada

By Patrick Westaway

When a foreign employer sends its employees to Canada, that employer must consider its own income tax position as well as that of its employees. The following identifies the Canadian income tax issues on both sides of the coin and, in the process, maps out the route to minimizing the consequences.

Starting with the employer’s position, it will generally^[1] be subject to Canadian income tax on Canadian-source income attributable to a Canadian “permanent establishment”—colloquially known as a “PE”. And, while a PE is most often thought of as a bricks-and-mortar location that actual or prospective customers might associate with the employer, a PE may in certain circumstances also include employees. Most commonly, an employee would be a PE of its employer if it “habitually exercises” in Canada the authority to contract on behalf of its employer. And, if we look specifically at U.S. employers, the definition of a PE would also include situations in which either: (i) a single employee provides services in Canada for 183 days or longer in any 12-month period and more than 50% of the employer’s gross active business revenues derives from those services; or, (ii) any number of employees provide services in Canada for 183 days or longer in any 12-month period in respect of a single or connected project. So, by sending employees to perform services in Canada, an employer could create Canadian income tax liabilities and tax filing obligations for itself.

Turning to the employee’s side of the coin, we must consider not only the employee’s personal position but also the consequent withholding, remittance and filing obligations of the employer. Both parties’ issues and their consequences are most effectively addressed by collapsing them into the following three-scenario framework. For the purposes of what follows, no distinction arises between the United States and other treaty jurisdictions.

A. The particular employee is present in Canada for more than 183 days in a 12-month period.

In this scenario ‘A’, the following would hold.

• There would be no treaty exemption.
• Both the employer and the employee would be required to open Canadian income tax accounts. In the case of the employer, it would apply for a “Business Number” and in the case of the employee, it would apply for an “Individual Tax Number” (ITN). 
• The employer would be required to issue a form T4A to each employee (reporting the employee’s Canadian-source employment income) and a T4A Summary to the Canada Revenue Agency (the “CRA”) (aggregating the information given on all T4As).
• The employer would be required to withhold and remit to the CRA the employees’ income taxes on their Canadian-source employment income.
• Each employee would be required to file a Canadian income tax return.
• Each employee’s Canadian income tax would be unrecoverable. Instead, the employees would claim foreign tax credits when filing their tax returns in their home jurisdiction.^[2]
• There would be temporary double tax for the period between the payment of Canadian income tax instalments and the rebate resulting from the foreign tax credits applied in the following year. While this could be addressed by loans from the employer to the employees, the employees would have to pay the prescribed rate of interest (currently, 5%), which would increase the amount of the loan and so also the interest, and so on. Alternatively, the employees would be taxed on the amount by which the prescribed rate of interest exceeds the amount of interest actually paid—again increasing the amount of the loan, the interest and so also the tax, and so on. In either case, such loans would be more expensive than the original tax liability.

B. The particular employee is present in Canada for fewer than 183 days in a 12-month period but both works in Canada for 45 days or more in the calendar year and is physically present in Canada for 90 days or more in any 12-month period that includes that time.

In this scenario ‘B’, the following would hold.

• There would be a treaty exemption from Canadian income tax (assuming that the employee is resident in a jurisdiction with which Canada has a tax treaty; the employee is present in Canada for fewer than 183 days in the 12-month period, the remuneration is paid by the foreign employer and the cost of such remuneration is not charged back to a Canadian PE of that employer).^[3]
• Despite the treaty exemption, all the points set forth in scenario ‘A’ would still apply except that the employer’s withholding and remittance obligation could be avoided by obtaining waivers pursuant to Regulation 102 of Canada’s Income Tax Act—colloquially known as “Reg102 waivers”. In other words, these waivers are intended only to address the temporary double tax problem.
• Unfortunately, Reg102 waivers: (i) must be applied for at least 30 days in advance of each visit; (ii) apply only to one employee such that multiple employees require multiple waivers; and, (iii) are only valid for 60 days. Depending on the cross-border employee traffic, applying for these waivers could be a full-time job.

C. The particular employee either works in Canada for fewer than 45 days in the calendar year or is present in Canada for fewer that 90 days in any 12-month period that includes that time.

In this scenario ‘C’, the following would hold.

• The situation would be the same as described in scenario ‘B’ except that, instead of applying for Reg102 waivers, the employer could obtain what is known as Non-Resident Employer Certification.
• Whereas a Reg 102 waiver is only good for 60 days and separate waivers are required for separate employees, Non-Resident Employer Certification lasts for 2 years and applies to all employees.
• To qualify: (i) the employer must be resident in a jurisdiction with which Canada has a tax treaty; (ii) the employees must also be resident in jurisdictions with which Canada has a tax treaty; and, (iii) the employees must be exempt from Canadian income tax under the applicable treaty (per the first bullet in Scenario ‘B’).
• Furthermore, the obligation to file forms T4A and a T4A Summary each year could be avoided if the employer “has no reason to believe” that each employee’s total Canadian-source income for the year will exceed $10k in the calendar year.

Lastly, in answer to the inevitable follow-up question, the penalty for simply ignoring the above obligations is 10% of the amount that was to have been withheld plus interest. That rate increases to 20% if the failure to withhold was made “knowingly or under circumstances amounting to gross negligence”.