Release date: November 6, 2012
Guest: Chris Chan
Running time: 10:29 minutes
In the first episode of our “Frequent Business Traveller Issues” series, Chris Chan gives an overview of the tax obligations of the employer and employee with regards to non-permanent residents providing services in Canada.
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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.
Sharon: Hi, it’s Sharon Mitchell of PwC Canada and this is the first podcast of a four part series addressing frequent business traveller issues. With us today is Chris Chan, a senior manager in our Toronto office. He specializes in the human resource challenges faced by both inbound and outbound international assignees.
Chris: Thank you Sharon – it’s nice to be here.
Sharon: Now Chris, can you give us a high level introduction as to why frequent business traveller issues are now on the government’s radar screen.
Chris: Sure Sharon, as the Canadian government proactively tries to attract more business investment into Canada, foreign companies who wish to conduct business here are often sending more and more employees from their home countries to perform employment duties here in Canada. In turn, this leads to foreign employers being subject to Canadian payroll withholding and reporting requirements.
In the past, many companies did not comply with these rules and the Canada Revenue Agency, or the CRA, was not known for vigorous enforcement of these rules. However, the landscape has changed dramatically because the CRA has increased its audit activities in this area, in requiring compliance for even short-term business travelers into Canada and assessing tax, penalties and interest on non-compliant companies.
In light of these facts, it is important that companies already conducting business in Canada, as well as companies looking to do business in Canada, understand these Canadian payroll compliance requirements given the increased scrutiny by the CRA in recent years.
Sharon: Chris, can you provide us with a brief explanation on how Regulation 102 and Regulation 105 relates to this?
Chris: Well, subsection 153(1) of the Canadian Income Tax Act prescribes the basic requirement to withhold Canadian taxes on various forms of payments. Regulations 100 to 108 provide the details on the withholding and remittance obligations.
Specifically, Regulation 102 essentially describes an employer’s requirement to withhold and remit Canadian personal income taxes on any payment of remuneration made to an employee for duties performed here in Canada.
Meanwhile, Regulation 105 is the requirement for every Canadian resident and non-resident to withhold 15% Canadian tax on any fee, commission or other amount paid for services rendered in Canada by a Canadian non-resident. An additional 9% Quebec tax withholding may apply for services rendered in the province of Quebec. However, remuneration is specifically excluded from Regulation 105 withholding requirements since it falls under Regulation 102 which I just mentioned.
Sharon: So based on what you have just described Chris, it appears the obligation to withhold Canadian tax under Regs 102 and 105 is placed on different “persons”. Can you confirm?
Chris: That is correct. The obligation to withhold tax under Regulation 102 is placed on an individual’s employer, whereas the obligation to withhold tax under Regulation 105 is placed on any Canadian person paying a fee, commission, etc. for services rendered in Canada. A Canadian person is any Canadian resident and/or non-resident.
Sharon: Under Regulation 102, what if the individual’s employer is not a Canadian resident corporation? Does Regulation 102 still apply?
Chris: Yes, Regulation 102 as well as Regulation 105 are not limited to Canadian resident corporations. As an example of Regulation 102, if a U.S. company sends one of its employees to work in Canada, that U.S. employer would have an obligation to withhold and remit Canadian personal income taxes.
Sharon: Ok Chris, you just provided us with an example of a U.S. company. Between the U.S. and Canada, there’s a tax treaty that provides relief from Canadian taxation for the remuneration of an individual if he or she does not spend greater than 183 days in Canada during any 12-month period beginning or ending in the fiscal year and the cost is not borne by a Canadian entity. How does the U.S.-Canada tax treaty impact the obligation to withhold Canadian taxes under Regs 102 and 105?
Chris: That’s a great question Sharon. From a Regulation 102 perspective, a lot of companies who send their employees to work in Canada often do not realize that the obligation to withhold Canadian taxes under Regulation 102 does not change as a result of the U.S.-Canada tax treaty or under any other treaty that Canada has with other countries. I also want to point out that the conditions you mentioned pertain to Article XV(2)(b) of the U.S.-Canada tax treaty. However, it should be noted that Regulation 102 still applies even if an individual is exempt from Canadian taxation under Article XV(2)(a) of the treaty, that is, if the remuneration attributable to their Canadian employment duties is less than C$10,000.
Now the same applies to Regulation 105. Therefore, even in the case where a Canadian non-resident rendering services in Canada is ultimately exempt from Canadian taxation, the payer of that fee, commission or other amount to the Canadian non-resident would still be required to withhold 15% Canadian tax on the payment.
Sharon: So in the case of Regulation 102, is it possible to have a scenario where a Canadian non-resident individual works in Canada and is exempt from Canadian taxation under a tax treaty but this individual’s employer is required to withhold Canadian personal income taxes?
Chris: Yes, absolutely. The obligation to withhold applies to all scenarios where an individual physically performs employment duties in Canada. The key issue for companies to understand is that Canadian taxation or exemption from Canadian taxation pursuant to a tax treaty is separate from an employer’s obligation to withhold Canadian tax on remuneration paid to employees.
Sharon: Surely Chris there must a de minimus amount of Canadian workdays and/or amount of remuneration before Reg 102 applies?
Chris: Unfortunately, there is no de minimus. From a technical perspective, an employer has an obligation to withhold Canadian personal income taxes from the employee’s very first work day in Canada and the related remuneration from that work day forward.
Sharon: So what penalties, if any, do employers face if they fail to withhold personal taxes from remuneration? Similarly, are there penalties for failure to withhold the 15% Canadian tax under Regulation 105?
Chris: Failure to withhold under Regulation 102 and Regulation 105 certainly has its related penalties.
In the case of Regulation 102, failure to withhold taxes from remuneration can potentially result in the Canada Revenue Agency levying a 10% penalty on the amount of tax that should have been withheld from the employees. This penalty can be increased to 20% if an employer continues to be non-compliant with Regulation 102. Furthermore, as part of the compliance process, a Canadian Form T4 should be issued to every employee who performs employment duties in Canada. Failure to issue T4 slips can also result in penalties ranging from C$100 to C$7,500 depending on the number of T4 slips that are late filed. Interest charges will also be accrued from the time the taxes should have been withheld to the time the taxes are actually remitted based on the prescribed rates.
The same penalties apply for the failure to withhold the 15% Canadian tax under Regulation 105.
Sharon: So Chris, it sounds like the penalties and interest can certainly add up.
Chris: Oh absolutely!
Sharon: Given the potential penalties and the increase in the CRA’s audit activities in this area, are there waivers that can be applied to exempt the tax withholding requirements under both Regulation 102 and Regulation 105? What is the process to comply with Regulation 102 and 105?
Chris: There are separate waivers for Regulation 102 and Regulation 105. In both instances, an approved waiver must be received before the tax withholding requirements are waived. For Regulation 102, there are two different waivers. The first one is Form R102-R and it is filed by the employee. The second one is Form R102-J and is jointly filed by the employee and employer. There are also two Regulation 105 waivers: Treaty-based waiver and Income and Expense waiver – both are filed by the non-resident rendering services in Canada. My colleague will discuss in detail the payroll compliance aspects including the conditions pertaining to the waiver applications in the next instalment of this podcast series.
Sharon: Thanks for joining us today, Chris. If people listening to this podcast have any questions pertaining to Regulation 102 and Regulation 105, can they contact you to discuss further?
Chris: Oh certainly. My contact details can be found on our PwC podcast website pwc.com/ca/taxtracks. I encourage our listeners to also tune into my PwC colleagues being interviewed in the next three podcasts in this frequent business traveller series.
The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.
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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.