Taxation of Non-resident Employees (Canada) - Tony G. Schweitzer

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Taxation of Non-resident Employees (Canada) - Tony G. Schweitzer

  1. 1. Taxation of Non-resident Employees Tony G. Schweitzer Direct Line: (416) 863-4407 tony.schweitzer@dentons.com September 2013 Dentons Canada LLP
  2. 2. Employment Income: Withholding and Reporting Obligations 2 • The Income Tax Act states that every person who pays at any time in a taxation year, a salary or wage or other remuneration shall, subject to certain exceptions, withhold from that payment the amount which is prescribed in the Regulations to the Income Tax Act (the “Regulations”).
  3. 3. Regulations continued 3 • No amount shall be deducted or withheld from a payment ……….. in respect of an employee who was neither employed nor resident in Canada at the time of payment except in respect of: a) remuneration ……..that is paid to a non-resident person who has in the year, or had in any previous year, ceased to be resident in Canada; or b) remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person.
  4. 4. India-Canada Tax Treaty 4 a) The recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant fiscal year; b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
  5. 5. Example 5 • “Indiaco” is a corporation resident in India, which does not have a presence in Canada. • Indiaco is affiliated with a corporation resident in Canada (“Canco”) that is part of the same worldwide group of companies. • Canco desires to bid on a Request for a Proposal. • In order to determine if Canco has the capability to complete the project, and to determine the appropriate parameters for Canco’s bid, Canco engages Indiaco to provide consulting services to Canco related to the bid specifics.
  6. 6. Example 6 • To complete its engagement with Canco, Indiaco sends employees to Canada (the “Employees”) for several months .Each Employee remains under the supervision and control of Indiaco. The Employees remain on the payroll of Indiaco. Should Canco be successful in obtaining the project, some or all of the Employees will be transferred to Canco to assist in completing the project. • It is assumed that none of the Employees will be a resident of Canada under the common law. • If an Employee is present in Canada for a period or periods not exceeding 183 days in the relevant fiscal year and the remuneration is paid by, or on behalf of, an employer who is a resident of India; and the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Canada, such Employee should not be subject to Canadian income tax on that income.
  7. 7. Example 7 • However, under domestic Canadian tax legislation, Indiaco will be required to withhold and remit source deductions from each Employee’s income received for employment exercised in Canada even if no tax is owed, unless a waiver is obtained. • Generally, it may be possible for each Employee to obtain a waiver to relieve Indiaco of its obligations to withhold. There are two difference waiver applications depending on the circumstances. • For any Employee who does not obtain a waiver, Indiaco will be required to withhold and remit source deductions to the Canada Revenue Agency. Ideally, a waiver in respect of each employee should be obtained prior to beginning work in Canada. Failure to comply with these regulations could subject Indiaco to possible penalties.
  8. 8. Example 8 • Additional withholding may be required on any payments made to Indiaco in respect of services rendered by it (through the Employees) in Canada. This would apply regardless of the residency of the payer. • The above is a very general summary of the law and is for information purposes only. We would be pleased to provide specific advice.
  9. 9. Planning 9 • Create waiver policy • Create assignment plan • Voluntary disclosure • Other waivers and permanent establishment issues
  10. 10. 10 Thank you!

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