Canadian Income Tax Implications for U.S. Employees Working in Canada
Regulation 102 of the Canadian Income Tax Act requires employers to withhold 15 percent tax (additional 9 percent if services are performed in Quebec) on any payments made to non-resident employees for services rendered in Canada.
Subject to the provisions of the treaty between Canada and the U.S. there are certain conditions that would circumvent this withholding requirement. The conditions would allow for the U.S. employee to perform services in Canada and for the remuneration to only be taxable in the U.S. and not subject to Canadian income taxes. These circumstances are as follows (assuming a Regulation 102 waiver has been applied for and obtained (discussed in the next section)):
- Such remuneration does not exceed ten thousand dollars ($10,000 U.S.) in any calendar year, or
- The U.S. employee is present in Canada for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year (rolling calendar) in question. A Canadian resident or permanent establishment (“PE”) does not get the benefit of the deduction.
Who Gets the Benefit of the Deduction?
An exception to the second stipulation is that the 183-day rule would not apply if the tax deduction for the services performed in Canada would be assumed by the Canadian PE, directly or indirectly. In this case, the $10,000 salary threshold would be the lone condition applied to the employee performing services in Canada in determining whether they are subject to Canadian income taxes. It is important to note that the 15 percent is not the definitive tax; rather, it is an installment towards the final tax liability.
Tracking Canadian Activity and Application for Waiver
As cited previously, if the remuneration is not expected to reach $10,000 U.S., an obligatory measure prior to sending people to Canada is the filing of a Regulation 102 waiver application with the Canada Revenue Agency (CRA). This application would need to be filed on behalf of the employee and would have to be submitted at least 30 days prior to rendering services in Canada outlining why Regulation 102 would not apply.
It is also recommended that the employer document earned income in Canada and the time employees are spending performing services in Canada to evaluate if withholding will be required considering any potential change in service time expectations. (View the Regulation 102 Waiver Application.)
New guidance was released by the CRA for payments made on or after January 1, 2016, which allows employers the ability to file a waiver application to be considered a non-resident employer. Approval of this application would eliminate the need for the waiver to be filed on behalf of each employee travelling to Canada. This blanket waiver is good for two years upon acceptance and requires the employer to track and record the activity of each employee travelling to Canada and their standing as a qualified non-resident employee. This application must also be filed at least 30 days prior to any services provided in Canada. (View the Application for Non-Resident Employer Certification.)
Considering that waiver applications can be challenging, some employers may prefer to withhold on all employees travelling to Canada regardless of the time expected to be spent in Canada. In this case, if the $10,000 U.S. threshold is not reached, a Canadian tax return could be filed on behalf of the employee requesting a refund of the entire withholding.
What Happens if Your Employee is Subject to Withholding?
If withholding is required, the employer will need to file:
- For a Canadian business number with the Canada Revenue Agency (“CRA”), and
- For a certificate of coverage from the U.S. Social Security Administration office on the employee’s behalf.
This certificate of coverage will allow the payroll provider to not withhold for the Canadian pension plan and Canadian employment insurance, which is required of Canadian residents. The employee will then need to file a personal Canadian income tax return. Payment of the withholding tax and subsequent filing of a Canadian tax return will most likely allow the non-resident to claim a foreign tax credit on their personal U.S. tax return.
Failure to Withhold
The CRA is very diligent about its governance of withholding tax requirements. If failure to withhold is identified, the employer would be responsible for the entire withholding requirement (including the employee’s share), plus significant interest and penalties.
Additional information on non-resident employee withholding can be found on the Canada Revenue Agency website.