In the 2015 Canadian Federal Budget, the Minister of Finance announced a program aimed at easing the administrative burden associated with Canadian withholding on remuneration paid to non-resident employees who performed duties in Canada.
Section 102 of the Income Tax Regulations (“Reg. 102”) requires every employer (whether a resident or non-resident of Canada) that pays remuneration to a non-resident employee, with respect to employment duties performed in Canada, to withhold Canadian taxes and other payroll remittances on that remuneration.
Before these Budget 2015 changes, there was no de-minimus exception and, while a tax treaty may ultimately provide an exemption from tax and payroll remittances, it does not exempt the employer from the initial withholding requirement. In fact, the only way an employer could be exempted from their withholding obligations was to apply, in advance, for a Reg. 102 waiver for each individual non-resident employee that was to perform duties in Canada. In order to obtain this Reg. 102 waiver an application had to be sent to the Canada Revenue Agency (CRA) at least 30 days before the start of the employment services or the first payment. Since employee travel is often arranged on short notice, this requirement created an issue for multinational companies doing business in Canada.
2015 Federal Budget Exemption
Budget 2015 proposed legislative changes to Reg. 102 that would simplify the Reg. 102 withholding process for certain non-resident employers and their non-resident employees working in Canada. The 2015 federal budget proposals, which became effective in 2016, provide an exemption from the Reg. 102 withholding requirement on an amount paid by a “qualifying non-resident employer” to a “qualifying non-resident employee.”
Qualifying Non-Resident Employer Conditions
A “qualifying non-resident employer” is an employer that:
- is resident in a country with which Canada has a tax treaty (a “Treaty Country”) at the time of payment or if the qualifying non-resident employer is a partnership, at least 90% of the partnership’s income or loss for the fiscal period at the time of payment is allocated to partners that are resident in a treaty country
- does not carry on business through a permanent establishment in Canada
- is at that time certified by the Minister
Qualifying Non-Resident Employee Conditions
A “qualifying non-resident employee” is an employee that:
- is resident in a Treaty Country
- is exempt from Canadian Part I income tax under a tax treaty
- is not working in Canada for 45 days in the calendar year that includes the time of the payment, or is present in Canada for less than 90 days in any 12-month period that includes the time of payment
Obtaining Certification as a Qualifying Non-Resident Employer
In order to obtain this certification, Form RC 473 – Application for Non-Resident Employer Certification must be completed by the employer and sent to the CRA at least 30 days before a qualifying non-resident employee starts providing services in Canada. The certification will generally, be valid for two years. However, it may be revoked if the employer fails to comply with certain obligations and requirements.
In order for the certification to remain valid the qualifying non-resident employer must:
- track and record the number of days each qualifying non-resident employee is either working in Canada, or is present in Canada, and the income attributable to these days
- determine and document whether the employee in question is resident in a Treaty Country
- evaluate and document if the qualifying non-resident employee’s remuneration is expected to be exempt from tax in Canada under a tax treaty with Canada
- obtain a CRA Business Number and, if required to make remittances, a payroll account number. Form RC1 – Request for a Business Number, can be attached to Form RC 473 if the employer does not already have these numbers
- complete and file a T4 Summary and Information Return for those employees who have provided employment services in Canada that are in excess of $10,000
- file the applicable Canadian income tax returns for the calendar years under certification
Impact for Qualifying Non-Resident Employers
These changes will reduce administrative hurdles for non-resident companies doing business in Canada through non-resident employees. The previous system of applying individually for a Reg. 102 waiver for specific employees was impractical for many employers. This certification process will provide the most relief to those employers whose employees must periodically travel to Canada on short notice, without the time to submit individual Reg. 102 waiver applications.
The obvious and immediate benefit to qualifying employers is the elimination of the need to go through the process of withholding, remitting and then requiring the employee to file a personal income tax return to receive a refund. However, it will be necessary to monitor the implementation of the certification process and employees’ actual experiences complying with the ongoing obligations before this process is declared an unqualified success.