Release date: November 4, 2015
Guest: Nupur Rishi
Running time: 08:50 minutes
In this episode of our “Top global mobility issues facing Tax Directors” series, Nupur Rishi looks at the taxation of non-resident director’s fees, and the distinctions that arise based on the type of remuneration received and location of services. The podcast also discusses potential treaty relief, as well as Canadian payroll withholding requirements.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.
You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Chantal: Hi, it’s Chantal McCalla of PwC Canada. Welcome to another instalment in our podcast series on the “Top mobility issues for Tax Directors to think about.” Today we are discussing “Non-resident Director fees”. We have Nupur Rishi with us, who is an experienced Tax Manager from the PwC Human Resource Services tax group. Nupur specializes in international assignments and expatriate tax management at PwC, and has been working in this field since 2004. Welcome, Nupur.
Nupur: Thank you Chantal, it’s a pleasure to be here.
Chantal: Nupur, generally speaking, how are director’s fees taxed in Canada?
Nupur: Under Canadian domestic tax law, a corporate director is seen as an “officer” or an employee of a corporation. Therefore, director’s fees received by a person are taxed as employment income.
Chantal: I see, so if the income is taxed as employment income, how would that affect a Canadian non-resident director? Would they be required to report 100% of the director’s fees received in Canada?
Nupur: Great question Chantal. Non-resident directors are taxed on their Canadian source income only. For example, director’s fees for meetings held in Canada, which the individual physically attended in Canada, would generate Canadian source income.
What is important to note is that the different types of income received by directors are sourced differently when determining Canadian taxable income.
Chantal: What would these types of income be and how would one determine the Canadian allocation of the director’s fees?
Nupur: Director fees could include various types of remuneration ranging from annual retainers, committee chair fees, or meeting fees to long term compensation such as stock options or restricted stock, to name a few. In order to apply the correct sourcing methodology, it is important to understand exactly what type of remuneration is being paid.
Some types of income may not actually be subject to Canadian income tax, while other types will need to be sourced on the basis of workdays. As an example, retainer fees may be excluded from Canadian taxation if they are not being paid for services rendered, but are instead paid regardless of whether the director is expected to attend any meetings or not.
For income sources allocated on workdays, it will be important to understand the total number of workdays allocated to director’s meetings. For instance, one should keep track of the total number of workdays spent inside and outside of Canada preparing for meetings, including any time spent trying to keep abreast of industry developments. This will help to reduce the taxable income sourced to Canada.
Therefore, to mitigate tax costs, it is essential to review the different types of income and their sourcing methodology.
Chantal: Nupur, for those companies engaging outside talent as directors, I imagine that those individuals may not be spending that much time in Canada. With that in mind, is there any treaty relief available to non-resident directors?
Nupur: Yes, Chantal, potentially treaty relief does exist. If we look at the Canada-U.S. Tax Convention as an example, it provides an exemption from Canadian taxation provided that the non-resident’s remuneration for employment exercised in Canada in a calendar year does not exceed 10,000 Canadian dollars. Accordingly, a director receiving up to 10,000 Canadian dollars in director’s fees for his or her work done in Canada would be able to file a Canadian personal income tax return claiming treaty exemption and can recover any taxes withheld.
For other treaty countries, director’s fees may or may not be separately addressed. Please bear in mind that the $10,000 exemption described previously only pertains to the Canada – US tax treaty. Many countries have no de minimus threshold. To determine whether any treaty relief exists, the treaty between the two countries must be reviewed.
On another note, treaty exemption will usually not affect the company’s withholding obligation.
Chantal: Ok, so on that last comment, is it possible to avoid withholdings all-together if a treaty exemption does apply?
Nupur: Yes, it is possible to apply for a waiver from the withholding requirement on the basis that the individuals will not earn enough to exceed the treaty limits. This application has to be filed on an annual basis and approval from CRA must be obtained before any payment is made.
Chantal: What about other tax withholdings such as the Canada Pension Plan and Employment Insurance?
Nupur: Interesting that you ask this Chantal – provided that the director is not ordinarily a resident in Canada, is not otherwise an employee of the corporation and his employment as a Director is performed wholly or partly outside of Canada, then the fees should not be subject to Canada Pension Plan. I will mention that although the director’s meetings would likely take place exclusively in Canada, it is probably arguable that his duties are performed at least partly outside of Canada. Employment Insurance is not deductible on director fees.
Chantal: So in tandem with the withholding requirements, can you elaborate on the employer reporting requirements and the director’s compliance requirements?
Nupur: Sure. The Canadian company would be required to comply with all payroll reporting and remittance obligations, such as the issuance of a T4 slip annually. Multiple T4 slips may be required in instances where services are performed both within and outside Canada or in more than one province.
I might also add that for US resident directors, the Canadian company will also be required to issue a Form 1099.
For the non-resident director, they would be required to file a non-resident Canadian personal income tax return in Canada to report the Canadian source portion of their director’s fees. The director should be able to claim a foreign tax credit on his or her home country return for the Canadian taxes paid to eliminate the element of double taxation.
Chantal: Thanks Nupur. Is there anything else the corporate tax director needs to think about?
Nupur: Yes, for directors who are US citizens or residents who have Canadian or other foreign deferred compensation plans, it is important to ensure that these plans comply with US requirements. Internal Revenue Code Section 409A can impose severe penalties on plan participants if the plan is not compliant with the regulations. This may necessitate changes to director deferred compensation plans so that the plans comply with both Canadian and US requirements.
As well, companies should be aware of potential adverse tax results, which may occur in situations where the company conducts its director meetings outside the jurisdiction of the entity. In many countries, this may give rise to the entity having a tax residence elsewhere if that residency depends on the entity’s place of management and not solely its place of incorporation. This may then potentially cause additional tax filings and liabilities.
Chantal: It sounds like there is much to consider from both the individual and company perspectives when you have a non-resident tax director.
Nupur: You are absolutely correct. It is extremely important that the compliance and reporting obligations in all jurisdictions are reviewed and met with to mitigate any risk or costs associated with non-compliance.
Chantal: Thanks for joining us today, Nupur.
Nupur: My pleasure Chantal.
Chantal: If people listening to this podcast have any questions pertaining to non-resident director’s fees, Nupur’s contact details are listed on our PwC podcast website at www.pwc.com/ca/taxtracks
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