Canada: Withholding Requirements for Foreign Employers May Be Eased

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July 10—The Canadian government is considering new tax rules that would ease payroll withholding obligations for foreign employers that have nonresident employees working in the country on short-term projects.

Under Section 102 of Canada’s Income Tax Regulations, payments received by nonresident employees for work performed in the country are subject to the same withholding requirements that apply to Canadian-resident employees. Unlike other jurisdictions that set minimum thresholds foreign employees need to meet to be subject to withholding, however, Canada's requirement is triggered after the foreign employee works a single Canadian workday.

Provisions of Canada's 2015 federal budget would relieve foreign employers of some of these withholding obligations. Under the revised framework, foreign employers would not be required to withhold payroll taxes from nonresident employees who have not been present in Canada for 90 days or more in any 12-month period that includes the time of payment. Nonresident employees would be required to meet other conditions to be excluded from withholding, including being a resident of a treaty country and being exempt from Canadian income tax under a tax treaty.

To qualify for the exemption, employers would be required to be resident in a country with which Canada has a tax treaty, not carry on business in Canada through a permanent establishment in the country and be certified by the Minister of National Revenue.

Foreign employers should note that the changes, which are expected to take effect Jan. 1, 2016, would not apply to reporting requirements, only to withholding.

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For more information on Canadian HR law and regulation, see the Canada primer.