As the working environment adapts to offer more flexibility with remote working options, understanding the tax nuances of cross-border remote working is becoming increasingly crucial. More than ever, employers are offering their teams the opportunity to work abroad for limited periods each year. Whether you're a non-resident considering remote work in Canada, or an employer considering adding Canada to your list of approved remote work locations, it's essential to be well informed about the tax implications of this type of work.
Canadian Tax Rules for Non-Residents
Under Canadian tax rules, non-resident employees who come to work in Canada remotely are subject to Canadian income tax on their employment income earned for work performed in Canada. It is important to note that while non-resident employees are subject to Canadian income tax, they may also be subject to tax in their country of residence. In this case, a tax treaty between Canada and the non-resident employee’s country of residence may provide for tax relief in Canada. In addition, the non-resident employee may be required to file personal income tax return in Canada.
All employers, whether based in Canada or abroad, are required to withhold income tax from the salaries or wages they pay to their employees in Canada and remit it to the Canada Revenue Agency (“CRA”). This withholding obligation applies from the first day of work and exists even if the non-resident employee is likely to be exempt from tax in Canada by virtue of a tax treaty signed between Canada and the non-resident employee’s country of residence.
Employers are also subject to tax reporting obligations in Canada. They may also be required to contribute to various social security programs and other employer taxes.
Exceptions to the Non-Resident Employer’s Income Tax Withholding Obligation
An exception to the non-resident employer withholding obligation may apply to a certified employer. A non-resident employer residing in a country with which Canada has a tax treaty can file Form RC473 with the CRA to become a certified employer. Certified employers are not required to withhold and remit tax on remuneration paid to their non-resident employees who work in Canada for a limited period and are exempt from Canadian tax under a tax treaty. To benefit from this exception, the non-resident employee must work in Canada for less than 45 days in the calendar year at the time of payment or be present in Canada for less than 90 days in any 12-month period including the time of payment.
Where the above exception does not apply or no longer applies, the non-resident employer may still be exempt from withholding tax if the non-resident employee is exempt from Canadian income tax under a tax treaty and applies for a waiver (Reg 102) from the Canada Revenue Agency (CRA).
In both cases, the non-resident employer will be exempted from its withholding tax obligation only after receiving approval from the CRA.
It is important to note that, while a certification or waiver may provide relief from Canadian income tax withholding obligations, it does not exempt non-resident employers from withholding and remitting social security contributions, such as Canada Pension Plan (“CPP”) and Employment Insurance (“EI”) on the remuneration of non-resident employees. The specific facts of the non-resident employer and each employee must be considered to determine whether an exemption applies.
In addition, an employer who sends non-resident employees to work remotely must consider whether their presence in Canada will result in an obligation on the part of the employer to pay Canadian income tax and/or file a Canadian income tax return. Most tax treaties between Canada and a foreign country provide protection against corporate income tax, provided that a business is not operated through a permanent establishment (“PE”). Careful consideration should be given to the PE provisions in each tax treaty, as the threshold varies from country to country.
When considering working remotely in Canada, non-resident employees and employers need to be aware of the various tax implications and considerations. Non-resident employers must have appropriate plans and systems in place to comply with complex Canadian tax issues. With the rapid increase in remote working, it is important to define new rules to provide even more practical solutions for remote working in Canada. It will be interesting to see whether the recent agreement between France and Switzerland on remote working could inspire Canada and other countries internationally. In the meantime, it’s essential that non-resident employers understand the potential liabilities associated with remote work and comply with the tax rules.