As remote work becomes the new norm in many industries, employers face a maze of tax obligations when their employees operate from Canada.
Whether intentional or a result of Covid-19 travel restrictions, these arrangements can spark a range of tax issues for non-Canadian employers.
In this blog, we shed light on some key considerations and obligations that employers must navigate when their employees work remotely in Canada.
Payroll Tax Obligations
Having an employee in Canada triggers payroll tax obligations for the employer.
These include deductions for income tax, Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and any applicable provincial payroll taxes.
While resident and non-resident employers share similar obligations, non-resident employers without a presence in Canada may not be required to withhold CPP contributions.
Similarly, they may not withhold EI premiums if they are payable under the employment insurance laws of the employee's home country.
However, when CPP contributions and/or EI premiums are due, the employer becomes liable for these on its own account.
Non-Resident Employer Certification
Under a non-resident employer certificate regime, certified employers resident in a treaty country may be exempt from deducting and remitting Canadian income tax on remuneration paid to qualified non-resident employees.
To qualify, employees must be residents of a country with which Canada has a tax treaty, and they must be exempt from Canadian income tax on the remuneration due to the treaty.
Additionally, the employees must not be present in Canada for 90 or more days in any 12-month period, or not in Canada for 45 or more days in the calendar year that includes the payment time.
While this certification offers relief, employers should ensure ongoing reporting and compliance to maintain eligibility.
Regulation 102 Waiver
For employers without non-resident certification or non-qualifying employees, a Regulation 102 waiver may be sought if the remuneration is exempt from Canadian income tax due to a tax treaty.
Income Tax Obligations
Having an employee in Canada may expose the employer to the risk of being considered to be "carrying on business" in Canada.
A non-resident carrying on business in Canada is generally liable for tax on profits from such activities, subject to any treaty exemptions.
Certain activities of the employee, such as soliciting orders or offering sales in Canada, may cause the employer to be deemed to be carrying on business in the country.
Employers entitled to treaty benefits are exempt from Canadian income tax on business profits if they do not have a permanent establishment (PE) in Canada.
However, certain scenarios, like employees having the authority to conclude contracts, may trigger PE status and tax obligations.
Regulation 105 Obligations and Waiver
When employees provide services in Canada, the employer's customer may need to deduct and remit 15% of the payment for those services to the CRA unless a waiver is obtained.
Employers can apply for waivers to reduce or eliminate withholding taxes, depending on treaty provisions and income projections.
Indirect Value-Added Taxes
Value-added taxes (GST/HST) apply on the supply of goods and services in Canada, requiring non-resident employers to register and comply with the GST/HST regime if they make taxable supplies in the country.
In sum, remote work arrangements in Canada can create complex tax implications for non-Canadian employers.
Understanding and fulfilling these obligations is essential to avoid potential pitfalls and ensure compliance with Canadian tax laws.
Seeking professional advice can illuminate the path forward and help employers navigate the tax terrain with confidence.
If you have any queries about this or other Canadian tax matters then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.