Remote work has become a new normal for many employees and employers, offering benefits to both parties. However, the prevalence of remote work has created new legal and regulatory challenges for employers and, in particular, employers with employees working in new jurisdictions.
A non-resident employer may, for example, become subject to Canadian income tax if the employer has employees working remotely from a location in Canada. Canadian employers may also have additional tax considerations if they have employees working remotely in other provinces.
This article outlines some of the potential Canadian tax issues for employees working remotely in Canada and the Canada Revenue Agency’s (the “CRA”) guidance and administrative concessions for non-residents during the COVID-19 pandemic.
To the extent that a Canadian employer employs employees outside of Canada, the employer will need to consider whether similar tax issues arise under the laws of the other jurisdictions (i.e. from both the employer’s and employee’s perspective and any payroll withholding obligations) and any potential tax treaty implications.
This article only briefly addresses the Canadian income tax issues with respect to the employment of individuals resident in Canada and/or employed in Canada. However, there could also be Canadian tax implications for an employer that has an employee that is either resident, or formerly resident, in Canada working outside of Canada.
Canadian Employers with Employees in Other Provinces
A corporation’s provincial income tax liability generally depends on the whether it has a permanent establishment in such province. Accordingly, unexpected provincial tax issues could arise if remote workers cause the employer to have a permanent establishment in provinces in which it otherwise did not have any operations. For example, the Income Tax Regulations deem a corporation to have a permanent establishment in a province for these purposes if the corporation has, in the province, an employee or agent with the general authority to contract on behalf of the corporation (or the employee/agent has a stock of merchandise, owned by his/her employer, used to regularly fill orders).
Accordingly, a corporation may become subject to a province’s corporate income tax if one or more of the corporation’s employees, with the general authority to contract on behalf of the corporation, works remotely from a province. For example, a remote employee may relocate from Ontario (location of the employer’s home office) to British Columbia in light of a new flexible work arrangement. His/her employer may become subject to BC provincial income tax with respect to a certain portion of its business income if the employee has the general authority to contract on behalf of the employer (or the employee regularly fills orders from a particular inventory of merchandise).
Each Canadian province can also impose various other taxes on corporations with employees in the province or an otherwise sufficient presence in the province. For example, an employer corporation may become subject to the Ontario employer health tax if the employer pays remuneration to: (i) employees reporting for work at a permanent establishment in Ontario; or (ii) employees not required to report for work at a permanent establishment but whose remuneration is paid from or through a permanent establishment in Ontario (i.e. remote employees).
In general, an employer should not necessarily become liable for the employer health tax solely by virtue of a remote employee working from a location in Ontario (assuming the employee is paid through a permanent establishment located outside Ontario and does not report for work at a permanent establishment of the employer in Ontario). However, the Employer Health Tax Act (Ontario) may deem an employer to have a permanent establishment in Ontario if a remote employee has the general authority to contract on behalf of the employer (such that the employee may be “reporting” to a permanent establishment). This may raise employee health tax implications for the entity employing the remote employee. Similar analysis with respect to each province’s taxes will need to be considered in which the employer has remote workers.
Non-Resident Employers with Employees in Canada
First, a non-resident may be subject to Canadian income tax if the non-resident carries on a business in Canada. One must examine a variety of factors to determine whether a non-resident carries on a business in Canada. This could include the presence of one or more employees working remotely from Canada on a temporary or permanent basis (e.g. as a result of pandemic-related travel restrictions).
The determination may also depend on the role or responsibilities of the employee. The Income Tax Act (Canada) deems a non-resident to be carrying on a business in Canada if the non-resident solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada. For example, the agent or servant may include a salesperson or account manager soliciting sales from Canadian customers (inside or outside Canada).
If the non-resident carries on a business in Canada, the non-resident will also be responsible for filing Canadian income tax returns and determining the amount of income attributable to its business carried on in Canada. This may become an administrative burden for taxpayers despite a liability for a potentially limited amount of income tax.
A tax treaty may provide relief in some circumstances. If a non-resident carries on business in Canada, but does not have a permanent establishment in Canada, the non-resident may not be subject to Canadian tax by virtue of an income tax convention between Canada and taxpayer’s country of residence. One must examine the treaty exceptions on a case-by-case basis. For example, the tax treaty may deem the non-resident to have a permanent establishment in Canada if a remote employee of the non-resident, situated in Canada, has the authority to contract on its behalf.
The CRA recognizes that individuals employed by a non-resident entity, who normally perform their employment duties outside Canada, may be performing their employment duties in Canada as a result of pandemic travel restrictions. If Canada has entered a treaty with the non-resident entity’s country of residence, the CRA will not consider the entity to have a permanent establishment in Canada solely due to its employees performing their employment duties in Canada (the CRA has adopted a similar position for “agency” permanent establishments as discussed above).
Second, a corporation may become subject to Canadian income tax if the corporation becomes resident in Canada. One determines the residency of a corporation by examining the location of its central management and control. The location of central management and control is typically the location where directors of the corporation exercise their management and control responsibilities (and, in some limited circumstances, the location of an employee or shareholder making significant management decisions for the corporation).
A director of a non-resident corporation, similar to an employee, may be working remotely from a location in Canada. The director’s presence in Canada may lead to the non-resident corporation becoming resident in Canada, subjecting the corporation to Canadian income tax on its worldwide income (not just its income earned from a business carried on in Canada). This may raise serious tax implications for the non-resident corporation.
A tax treaty may provide relief in some circumstances. If a corporation is resident in Canada and another country with which Canada has entered an income tax convention, the corporation may be deemed to be resident in its country of incorporation; regardless of where the corporation’s directors exercise management and control. However, this exception only applies under certain tax treaties. Under other treaties, one determines the residency of a corporation, resident in both contracting states, by examining the corporation’s place of effective management and control (e.g. where the directors make decisions) (among other factors).
The CRA recognizes that pandemic-related travel restrictions may prevent directors from travelling abroad to attend board meetings. The directors may necessarily attend a board meeting in Canada via a video conferencing application (potentially making the corporation resident in Canada by virtue of making management decisions from a location in Canada). If a treaty with a place of effective management and control tiebreaker rule applies to the corporation, the CRA will not consider the corporation to become resident in Canada solely by reason of the director participating in a board meeting from Canada due to travel restrictions.
Payroll Withholding Obligations for Remote Employees
Employee payroll withholding obligations in Canada are generally the same for an employer regardless of whether the employer is a resident or a non-resident of Canada. An employer must withhold income tax from payments of remuneration paid to an employee (in addition to reporting and filing obligations with respect of such withholdings) to the extent that the employee is resident in Canada and/or employed in Canada.
The withholding rate will generally depend on the location from which the employee’s remuneration is paid (assuming the employee does not report to work at an establishment as in the case of a remote employee). For example, if an employee works remotely in BC, and the employer pays salary/wages to the employee from an establishment in Ontario, the employer should refer to the Ontario payroll deductions table to determine the applicable rate. If the employer does not have an establishment in Canada, the employer should refer to the “Beyond the limits of any province/territory” deductions table to determine the applicable rate.
A tax treaty may provide relief for non-resident employees in some circumstances. For example, under the tax treaty with the United States, if (i) a non-resident individual is not present in Canada for more than 183 days in a year, (ii) the non-resident employer pays the employee’s remuneration (i.e. not resident in Canada), and (iii) the remuneration is not borne by a permanent establishment in Canada, the individual (assuming he or she is eligible for benefits under such treaty) will be exempt from Canadian income tax with respect to his/her employment income (the CRA has also outlined administrative concessions for individuals who must stay in Canada for more than 183 days as a result of pandemic-related restriction). The employer will still generally have a payroll withholding obligation and, therefore, a non-resident employee who wants less tax to be withheld based on a tax treaty will need to obtain a waiver from the CRA. To the extent eligible, a qualified non-resident employer with non-resident employees in Canada should consider obtaining a Non-resident Employer Certificate.
Regulation 105 Withholding
In addition, any person making a payment to a non-resident person of a fee, commission, or other amount in respect of services rendered in Canada generally has an obligation to withhold 15% of such payment (and remit the amount to the CRA). This withholding obligation may affect non-resident employers with employees working remotely in Canada. For example, if a payor makes a payment to a non-resident employer for services rendered by its employee working remotely in Canada, the payor may have an obligation to withhold 15% of the payment.
A non-resident employer may apply to the CRA for a waiver with respect to such withholdings. The waiver would reduce or eliminate the amount that a payor must withhold from a payment to the non-resident. In the alternative, the non-resident may apply to the CRA for a refund of withheld amounts to the extent that it is entitled to such a refund.
Remote working arrangements raise a variety of Canadian income tax issues for employers. An employer should ensure that it has policies governing how long an employee may (or may not) work outside of the employer’s normal jurisdiction, and in particular, ensure that employees with certain responsibilities, including the authority to contract on behalf of the employer, disclose any potential long-term stays outside of their jurisdiction.