respect of non-resident employees where these Practice Notes conditions are not satisfied. This article2 revisits the applicable withholding obligations and Comments where the new exemption does not apply, with a view to providing guidance This regular feature is edited on the ap- by propriate actions of a non-resident Gregory J. Winfield of McCarthy employer in Tetrault this type of situation in LLP. It discusses tax developments order to comply with its withholding obligations affecting the taxation of compensation 3 without needlessly putting undue hardship on its non-resident and retirement and focuses on Canada employees who are in Canada Revenue Agency policies and practices. on only an occasional basis. The focus herein is on U.S. resident employees, although similar concerns SOURCE WITHHOLDINGS apply to residents of other jurisdictions. Canadian Tax Liability of Source Non-resident Employee Withholdings for Performing Duties in Canada Non-residents are subject to tax under U.S. Employees Part I of the Income Tax Act4 on all income from "office and employment" that is attri- in Canada: an butable to duties performed in Canada. Ac- cordingly, absent relief under the applicable Ongoing Challenge provisions of a reciprocal tax treaty, where a non-Canadian resident performs any amount of employment duties in Canada, even, for Anu Nijhawan example, the mere attendance in Canada for a Bennett Jones LLP one-day meeting, he or she will be subject to Canadian income tax on the portion of the income attributable Introduction to Canadian duties. It is often surprising for United States or other foreign-based corporations to discover that payments made to non-residents of Can- 2 This article provides an update of the issues ada who perform employment services in considered more than ten years ago: see Anu Nijhawan, Canada are, absent a waiver from the Canada "Source Withholdings: Non-resident Employees 'Visit- Revenue Agency (the "CRA"), subject to ing' Canada" (May 2004) 15 Taxation of Executive Canadian tax withholding, even if such Compensation and Retirement 412. income is ultimately exempt from Canadian 3 This article does not consider source withholdings in income tax under a tax treaty. Recent changes respect of Canada Pension Plan contributions and announced in the Canadian federal budget Employment Insurance premiums. For guidance on assist, by adding, effective January 1, 2016, an these issues, reference should be made to the provisions exemption to the withholding requirement of the Canada Pension Plan Act and to the Employment where: (i) the employer is a non-resident of Insurance Act, as well as to the reciprocal social Canada, is resident in a country with which security treaties that Canada has entered into with various foreign jurisdictions. Canada has a tax treaty, and does not carry on See, for example, the 1981. business Canada-U.S. Agreement with Respect to Social Security in Canada through a permanent and the establishment; 1942 Canada-U.S. Agreement Respecting Un- (ii) the employee is exempt employment Insurance, Relief from from. Canadian CPP withholdings tax under a tax treaty; and (iii) may be available where the employee obtains a the certifi- employee is present in Canada for less cate of social security coverage in his or her country of than 90 days in any 12-month period that residence. Relief from EI premiums is generally avail- includes the time of payment.' Employers will, able where premiums are required to be paid in the however, remain liable for any withholdings in employee's country of residence on the employment income from providing services in Canada. 4 R.S.C. 1985, c. 1 (5th Supplement), as amended, 1 The foreign employer must be certified by the hereinafter referred to as the "Act." Unless otherwise Minister in order for this exemption to be available. stated, statutory references in this article are to the Act. 1626 PRACTICE

Depending on where a non-resident indivi- that should have been withheld (subject to a dual employee is resident, relief from the statutory right to recover the amounts from the foregoing Canadian income tax may be avail- non-resident employee) plus interest and able pursuant to the provisions of a reciprocal penalties. tax treaty. For example, in the case of a U.S. Even when the treaty exemptions from resident, Article XV(2) of the Canada-U.S. Canadian income tax are available, the CRA Tax Convention generally provides that a has long adopted the position that the re- resident of the United States is not subject to quirement to make source withholdings never- Canadian tax in respect of Canadian employ- theless applies,7 subject to the new exemption ment income where: introduced by the Canadian federal budget. • such remuneration does not exceed This position, while seemingly harsh, is, in Cdn$10,000 in a calendar year; or the writer's view, technically correct, at least under Article XV of the Canada-U.S. • the individual is not present in Canada in Treaty, since the article applies only to an excess of 183 days in any 12-month period individual's substantive Canadian tax liability; beginning or ending in the tax year and the it does not refer to the payer's Canadian remuneration is not paid by or on behalf of employment withholding, remittance, or re- a Canadian-resident person and is not porting responsibilities.8 borne by a Canadian permanent establish- ment. The CRA has confirmed that the The necessity for an employer to make second branch of this test is met even Canadian source withholdings in respect of where the costs of a U.S. employee are amounts paid to a non-resident employee may cross-charged to a Canadian subsidiary, so lead to undue hardship for such employees, long as there is no employment relation- particularly where the jurisdiction of the ship, in substance or form, between the employee's residence also mandates source Canadian corporation and the individual.5 withholdings in respect of Canadian-source employment income. For example, where a Accordingly, in the circumstances with U.S.-resident employee provides services for a which this article is concerned, where the U.S. corporation in both the U.S. and Canada, provisions of a tax treaty apply, a U.S. it is generally understood that the remuner- individual who is present in Canada only on a ation in respect of Canadian services will be transitory basis and whose salary is borne subject to both Canadian and U.S. source entirely by his or her foreign employer should withholdings. If a treaty exemption is avail- not be subject to Canadian income tax. This able, the Canadian withholdings should ulti- conclusion does not, however, end the mately be recoverable by the U.S. employee analysis. filing a Canadian tax return but the employee for excess Obligation to Make Source will nonetheless be out-of-pocket tax refund Withholdings tax until such time as the Canadian is received. In such a situation, a waiver The Act requires "every person" paying should be considered. salaries and wages or other remuneration to make and remit to the CRA source with- Application for a Waiver holdings in respect of Canadian tax from The CRA has adopted two waiver any such payments.6 Because this obligation application forms to be used where relief from applies to "every person," the withholding obligation applies equally to Canadian resident employers and to non-resident employers. 7 The CRA has adopted an administrative exemption for for 10 Failure to make the prescribed source with- U.S. employees attending a conference in Canada than Cdn$10,000: CRA holdings may subject the non-resident em- days or less and earning less 2012-044074117 (July 6, 2012). ployer to liability for the whole of the amount Document 8 This should be contrasted, for example, with article 15(5) of the Canada-United Kingdom Tax Convention, 5 See, for example, CRA Document 2011-0418281E5 which provides for relief from double withholding (January 23, 2012). obligations when both countries impose withholding on country in which 6 Pursuant to Regulation 102, such withholding is to be the same income. In such a case, the made on a graduated basis, depending on the amount of the employment income is derived is permitted to make the payment. withholdings, but the other country is not. 1627 PRACTICE withholding is requested due to a tax treaty employer concerning the applicability of a tax exemption. treaty exemption. The first, Form R102-J (Regulation 102 Even where a waiver is granted or the new Treaty Based Waiver Application — Joint withholding exemption applies, the employer Employer/Employee), is to be used where the will still be required to issue T4 information U.S. resident will earn no more than slips to the non-resident employee and the Cdn$10,000 or where it is not practical to non-resident employee will still be required to apply for the second type of waiver before the file a Canadian income tax return if he or she start of the services because of the nature of has a Canadian tax liability for the year. the services being performed (for example, services for which the dates and names of Impact of Perimeter Initiative employees coming to Canada cannot be We suspect that, historically, many U.S. determined until the last minute). and other non-resident corporations have ta- ken the practical position that, where the The most recent release of this form physical presence in Canada of their em- indicates that it should be submitted 30 days ployees is infrequent and transitory and most before the commencement of services in communications and work product originate CRA has Canada, but it is understood that the from the U.S. office, all of the employment waiver adopted a more flexible position. If a services are in substance rendered outside application is approved, the CRA will issue a Canada such that there is no withholding letter to the employee and the employer required.9 This argument, is, however, difficult employer not to withhold tax authorizing the to make where a non-resident employee is on payments made to the employee. The physically present in Canada during the course authorization is effective on the later of the of his or her employment and receives a provided by the start date for the services specific amount that can be shown to be 60 days employee in Canada that year and related to his or her presence in Canada. before the date that the CRA received the complete waiver application. This method The relatively new joint initiative be- allows an employer to receive a waiver that tween Canada and the United States to share has an effective date preceding the waiver information about when individuals cross the application date. Canada-U.S. border allows both countries to accurately track the number of days spent If the R-102J waiver is not available, the in each country by a particular individual. second form, Form R102-R (Regulation 102 Although not as tax imitative per se, the Waiver Application) is to be used. In order to collected information is expected to highlight waiver, the employee apply for an R102-R the withholding issue. With this governmental and available only must have a SIN (required tracking system in place, it is important that if the employee has a legal right to work in non-resident individuals and employees take of application Canada) or an ITN. This form steps to comply with their Canadian with- for the also requires a written attestation holding tax obligations.

9 Regulation 104(2) contains an exemption from with- holding where the employee is neither employed in nor resident in Canada at the time of the payment and the remuneration is not attributable to employment duties performed in Canada. 10 See "Beyond the Border: A Shared Vision for Peri- meter Security and Economic Competitiveness." The section entitled "Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan" became fully effective on June 30, 2014.

1628