Canadian Budget Offers Exception to Foreign Withholding Requirements

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By Peter Menyasz

April 21 — Canada's fiscal 2015-16 budget plan includes new provisions to ease foreign firms' long-standing concerns about the application of Canadian withholding requirements for foreign employees working in Canada.

The budget proposes an exception to the current withholding requirements for payments by foreign employers to foreign employees in Canada who aren't subject to Canadian taxation. Those mandates that have repeatedly been cited by businesses engaged in cross-border trade and commerce as a significant administrative burden.

The exception would apply to payments to qualifying nonresident employees that are exempt from Canadian income tax due to a tax treaty, and that are not in Canada for 90 or more days in any 12 month period that includes the time of the payment, the Finance Department said in its detailed Budget Plan.

To qualify as nonresident, the employer must also be a resident in a country with which Canada has a tax treaty. For a partnership, at least 90 percent of the partnership's income for the relevant fiscal period must be allocated to non-Canadian residents in a treaty country, the department said.

In all cases, the employer must not carry on business through a permanent establishment in Canada and must be certified by the minister of national revenue.

“Although a qualifying nonresident employer will not be obligated to withhold under these circumstances, it will continue to be responsible for its reporting requirements under the Income Tax Act with respect to amounts paid to its employees,” it said. “Employers will continue to be liable for any withholding in respect of nonresident employees found not to have met the conditions.”

The department noted, however, that nonresident employers will not be subject to a penalty if it fails to withhold taxes for a payment if, based on reasonable inquiry, it had no reason to believe that the employee did not meet the required conditions for the exception, it said.

183-Day Threshold

Currently, residents of countries with which Canada has a tax treaty are generally exempt from Canadian tax on employment income from a nonresident employer if the employee is present in Canada for no more than 183 days in a 12 month period and the employer has no permanent establishment in Canada, the department said. But a nonresident employer is generally required to withhold amounts on account of a nonresident employee's Canadian income tax liabilities, even if the employee is expected to be exempt from Canadian tax.

“It may be possible for the employer to obtain an employee-specific waiver from the Canada Revenue Agency to be relieved from its obligation to withhold. However, the existing employee waiver system has been criticized as inefficient because each waiver is granted only in respect of a specific employee and for a specific time period,” it said.

The measure is open to comment through June 30, 2015.

Revised Income Tax Folio

Separately, the Canada Revenue Agency April 13 issued Income Tax Folio S3-F3-C1 on “Payments from Employer to Employee.” The Income Tax Folio discusses: the federal income tax treatment of certain payments to individuals, such as inducement payments and non-competition payments made to departing employees; payments deemed to be employment income; and amounts receivable in respect of a covenant. Tax Folio S3-F3-C1 is effective immediately and replaces and cancels Interpretation Bulletins IT-196R2 on “Payments by Employer to Employee” dated Nov. 23, 1981 and IT-196R2SR, “Payments by Employer to Employee” dated May 25, 1984.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

The budget plan is available at http://www.budget.gc.ca/2015/docs/plan/budget2015-eng.pdf.

A budget summary is available at http://www.budget.gc.ca/2015/docs/bb/brief-bref-eng.pdf.

Income Tax Folio S3-F3-C1 on “Payments from Employer to Employee” is available at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s2/f3/s2-f3-c1-eng.html.

More information on payroll issues in Canada is available in the Canada country primer.