Canada Proposes Reforms on Nonresident Tax Withholding

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By Jared Mondschein

Aug. 4—The Canadian Department of Finance July 31 proposed legislation that would make certain nonresident employers exempt from the withholding requirements for qualifying nonresident employees temporarily working in Canada.

Current law requires nonresident employers to withhold taxes for nonresident employees temporarily working in Canada, regardless of whether income tax treaty provisions would allow exemption from Canadian taxes. Employers can apply for employee-specific waivers but these only are granted to specific employees for specific time periods scheduled in advance. When employers do not procure a waiver for an employee that should be exempt from Canadian taxes based on a tax treaty, the employer is to withhold taxes from pay and the employee is required to file a return to the Canadian Revenue Authority (CRA) to claim a treaty-based refund on their withheld taxes.

Proposed Legislation

Under the proposed legislation, as of Jan. 1, 2016, “qualifying nonresident employers” would be exempted from withholding Canadian taxes for “qualifying nonresident employees” if certain conditions are met. A “qualifying nonresident employer” (QNRER) must be:

• a resident of a country with which Canada has a tax treaty;

• if a partnership, then 90 percent or more of the income or loss of the partnership for the fiscal period that includes the time of the payment must be allocated to partners who are resident in a treaty; and

• is certified by the CRA.

A “qualifying nonresident employee” (QNREE) must be:

• a resident of a country with which Canada has a tax treaty;

• is not liable to tax because of that treaty; and

• works in Canada for less than 45 days in the calendar year that includes that time, or is present in Canada for less than 90 days in any 12 month period that includes that time.

The proposed legislation, which differs from the initially proposed reform first announced April 21, 2015, in the government budget for 2015, clarifies that the minister can certify an employer to be a QNRER for a specified period of time if the employer has applied with a form containing the necessary information. The CRA also can revoke the certification if it is deemed the employer no longer meets the required conditions.

In the case that an employee turns out to not be a qualified after a qualified employer does not withhold tax, the legislation would exempt the qualified employer from a penalty if “after reasonable inquiry,” it is clear that the employer had no reason to believe the employee was not qualified at the time of payment.

The proposed legislation clarifies that reporting is required for payments exempt from the withholding requirements unless a de minimis exception of C$10,000 ($7,585) in a calendar year is met before applying treaty exceptions.

Remaining Details Needing Clarification

While the proposed legislation clarified certain areas that remained unclear in a prior budget proposal, other areas remain less transparent. The “legislation is still very brief and clearly leaves a lot of discretion in the CRA's hands,” PriceWaterhouseCoopers partner Dan Fontaine said in an e-mail to Bloomberg BNA. “There do not appear to be any regulations proposed that will provide any framework for what the conditions [established by the CRA] will be,” he said.

The legislation omits any mention on what form or details will be necessary and also does not clarify the requirement timing for the application process.

Due to the dissolving of parliament following Prime Minister Harper's Aug. 2 calling of elections, the bill cannot be officially proposed until after the nationwide Oct. 19 vote.

The Department of Finance invited comments on the draft legislative proposals by Sept. 30, 2015, but could not be reached for more clarification on this issue.

The CRA, which had issued clarifying answers to 16 questions arising from the initial budget's proposal and would be tasked with administering any approved legislation, referred all comments on the July 31 proposed legislation the Department of Finance.

To contact the reporter on this story: Jared Mondschein at jmondschein@bna.com

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com

The proposed legislation and explanation of the legislation is available at http://www.fin.gc.ca/drleg-apl/2015/ita-lir-0715-eng.asp.

More information on payroll issues in Canada can be found in the Canada country primer.