Written By Anu Nijhawan and Tamara Larre

Due to the growth of foreign business activities in Canada, it has become commonplace for employees of foreign corporations to occasionally visit Canada to, for example, briefly attend a meeting or tour Canadian facilities. The recent increase in enforcement action by the Canada Revenue Agency (the “CRA”) in the international tax arena may, however, catch at least a few of these non-resident corporations by surprise with regards to their obligations under Canada's Income Tax Act (the “Act”) to make source withholdings on salary paid to non-resident employees for the periods during which the employee is present in Canada.

Canadian Tax Liability Of Non-Resident Employee Performing Duties In Canada

Non-resident persons are subject to Part I tax under the Act on all income from “office and employment” that is attributable to duties performed in Canada. Accordingly, absent relief under a reciprocal tax treaty, a non-resident will be subject to Canadian income tax on the portion of his or her income attributable to duties performed in Canada. This would apply, for example, to impose tax where the non-resident employee attends a one-day meeting in Canada. On this point, the CRA takes the position that, where the non-resident employee performs duties both inside and outside of Canada, the employment income should be allocated on a per diem basis.

Depending on where a non-resident employee is resident, relief from the foregoing tax may be available under a tax treaty. For example, under the Canada-US Tax Convention a resident will generally not be subject to Canadian tax on employment income where:

• such remuneration does not exceed CDN $10,000; or
• the individual is not present in Canada more than 183 days during the calendar year and his or her remuneration is not deducted by a Canadian resident employer.

However, as explained below, the mere availability of treaty relief may not relieve a non-resident employer from making source withholdings in respect of salaries paid to the employees for duties performed in Canada.  

Obligation To Make Source Withholdings

The Act requires both resident and non-resident employers paying salaries, wages, and other remuneration to make and remit to the CRA source withholdings in respect to Canadian tax on any such payments. It is suspected that many non-resident corporations take the position that, where the physical presence in Canada of their employees is infrequent, all of the employment services are in substance rendered outside Canada such that there is no withholding required. However, this argument may be difficult to make where a non-resident employee is physically present in Canada during the course of his or her employment and receives a specific amount relating to his or her presence in Canada, as is the case where a director of a non-resident corporation receives a per diem fee for every day spent in Canada.

Failure to make the prescribed source withholdings may subject the non-resident employer to liability for the amount that should have been withheld, subject to a statutory right to recover the amount from the non-resident employee, plus interest and penalties.

The CRA takes the position that even where the treaty exemptions from Canadian income tax are available, absent a waiver, the employer must nevertheless withhold tax on Canadian- source employment income. This may lead to undue hardship where the jurisdiction of the employee's residence also requires source withholdings in respect of the Canadian source employment income. For example, where a US-resident employee provides services for a US corporation in both the US and Canada, the remuneration in respect of the Canadian services may be subject to both Canadian and US source withholdings. If a treaty exemption is available, the Canadian withholdings should ultimately be recoverable upon the non-resident employee filing a Canadian tax return, but the employee will nonetheless be out-of-pocket in the meantime. As discussed below, in order to avoid this problem it may be possible to obtain a waiver of the employer's duty to withhold from the CRA.

Application For a Waiver

The CRA has the authority to grant a waiver where the withholding would cause undue hardship.

Administratively, a non-resident employee can request a waiver if he or she can demonstrate that, on the basis of treaty protection, he or she will not be subject to Canadian income tax. Although there is no standard form for making the application, there are certain pieces of information that should accompany the waiver application. Unfortunately, the CRA will not issue blanket waivers and accordingly, it is necessary to apply for and obtain a waiver prior to each time the non-resident employee comes to Canada.

Conclusion

As more and more non-residents visit Canada in the course of their employment duties for foreign corporations, the issue of Canadian source withholdings will increase. Foreign employers faced with this issue should consider applying for waivers on behalf of their employees as an alternative to compensating non-resident employees for the excess Canadian tax withheld during the period the employee is out-of-pocket and for the costs of obtaining a Canadian refund of such taxes.