ITA regulation 102 requires employers to withhold tax on remuneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver (regulation 102 waiver) or certification as a qualifying non-resident employer. However, often there is not sufficient time to do this before the employment is to begin, or there is a lack of awareness of the rules. Where the employer must withhold tax, should the amount be based on the non-resident employee’s Canadian income or worldwide income? Clarification from the CRA would be appreciated.
Specifically, regulation 102 imposes withholding on “any payment of remuneration . . . made to an employee in his taxation year. . . .” The definition of “remuneration” under regulation 100(1) does not specify that the remuneration is only in respect of Canadian employment. Accordingly, a cross-border non-resident employee who is employed in Canada for 5 percent of his or her workdays could technically be subject to Canadian withholding tax on all worldwide remuneration, in addition to withholding tax in his or her country of residence. Of course, this excess Canadian withholding would be refunded after the employee files a T1 tax return.
Subparagraph 115(1)(a)(i) specifically limits the taxable employment income of a non-resident person earned in Canada to “incomes from the duties of offices and employments performed by the non-resident person in Canada.” Thus, the person is not liable for tax on non-Canadian income. One might extend this argument to withholding and therefore not withhold tax on such income, on the basis that the regulations should be interpreted in the entire context of the scheme and object of the Act. Thus, in practice, the withholding amount is generally calculated in accordance with this principle by multiplying the non-resident employee’s annual remuneration by the number of days worked in Canada divided by the total number of working days that year. Commentators have generally recommended this approach; see, for example, “Regulations 102 and 105 and Cross-Border Compliance Issues” in the Canadian Tax Foundation’s 2013 annual conference report.
The difficulty is that the CRA has not explicitly endorsed this approach, except in narrow circumstances. Guide T4001, the “Employers’ Guide—Payroll Deductions and Remittances,” suggests that non-resident directors who attend meetings in Canada are subject to Canadian income tax and withholding based on the number of working days they spend in Canada in relation to the total days they worked overall. Similarly, in respect of a non-resident employee stock option plan, the CRA suggests calculating an employee’s taxable Canadian income by multiplying the total benefit derived by the proportion of working days spent in Canada over the total number of working days that year (CRA document no. 2012-0440741I7, July 6, 2012).
Employers looking to avoid being assessed penalties for underwithholding would appreciate more general assurance that only Canadian income of non-resident employees is subject to withholding.
The author would like to thank Travis Bertrand, articling student, for his contribution to this article.
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Reprinted from Canadian Tax Focus, May 2019, by permission of the Canadian Tax Foundation.