Release date: November 20, 2012
Guest: Shabnam Malik
Running time: 13:56 minutes
In the second episode of our “Frequent Business Traveller Issues” series, Shabnam Malik provides a deeper explanation of compliance issues, for both the employer and employee, surrounding frequent business travellers.
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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, welcome to the second instalment in our PwC four part podcast series on frequent business traveller issues. With us today is Shabnam Malik, a senior manager who has over 13 years of experience in tax with a focus on International Assignments and Expatriate Management
Shabnam: Thank you Sharon
Sharon: Now Shabnam, from the previous podcast, we understand that there are various withholding tax and payroll administration issues to consider when foreign companies provide services in Canada or send employees to work in Canada. To start us off, can you tell us what has changed in recent years that have increased the focus in this area?
Shabnam: Sure Sharon, to clarify, it’s not that legislation has changed in this area, but that CRA’s focus has changed. In the past, compliance in this area was not enforced but the payroll audit landscape has changed significantly in recent years. In February 2005 CRA issued an Information Circular 756R2 that provided guidance on withholding and reporting of income paid to non-residents providing services in Canada.
As a result, they have spent time enforcing compliance in this area and many companies have been caught via various corporate tax audits. In these cases, CRA has been known to request lists of business travellers as part of their audit. With this information in hand, they have been able to determine non-compliance in this area and levy penalties and interest thereon.
Sharon: So companies can be blindsided if they aren’t aware of these issues. On that note, could you take us through the withholding requirements specific to Regulation 105?
Shabnam: Regulation 105 deals with payments made to non-resident individuals (such as subcontractors) and companies also. Under the Regulation 105 any person paying fees, commissions or other amounts to a non-resident for services rendered in Canada is obligated to withhold 15% tax and remit it to the CRA. This is called the Regulation 105 Withholding. This is required even if the income itself is tax exempt under a tax treaty that Canada may have with another country.
Sharon: Now, just delving further on the withholding, what if the payments to a non-resident is for services rendered both in Canada and another country, then is Reg 105 withholding required on 100% of the payment?
Shabnam: No, the Reg 105 withholding is required only for the portion related to the services performed in Canada. If it is not clear what portion of the payment is for the services performed outside Canada then the 15% withholding is to be applied on the full payment.
Sharon: Now, is there any relief available from the Reg 105 withholding tax?
Shabnam: Well, the CRA may waive or reduce the required withholding if a non-resident can demonstrate that the income is tax exempt under a tax treaty or the required withholding is in excess of the ultimate tax liability. It should be noted that Canada does not relinquish its right to the Reg 105 withholding through income tax treaties, it is done through the waiver process. If a tax treaty’s applicable then the payer or payee can apply for a waiver for the reduced tax withholding with the CRA but the waiver must be approved by the CRA in advance.
Sharon: I understand there are two different types of waiver procedures available to have the required withholding under Reg 105 waived or reduced Shabnam.
Shabnam: That is correct.
The first is a Treaty Based Waiver. In this case, the residents of countries that have a tax treaty with Canada can file a waiver with the CRA for reduced tax withholdings under the tax treaty. However, if the income taxable in Canada is less than $5,000 then the non-resident can apply for a waiver even if he is from a country that does not have a tax treaty with Canada.
The second type is an Income & Expense Waiver. In this instance, non-residents who do not qualify for a waiver of the Reg 105 withholding under a tax treaty may submit an application for the reduction of the Reg 105 withholding based on a statement of their income and expenses related to their services provided in Canada. This process provides that a non-resident person may claim expenses against the Canadian sourced income with net income being subject to tax at graduated rates rather than at flat 15% withholding tax. This is an estimate of the non-resident’s potential tax liability to Canada at the time application is made. CRA will review the waiver and consider the reasonableness of the expenses claimed and determine whether the non-resident qualifies for a reduction of the withholding tax based on their waiver application. This process is not intended to replace filing a Canadian income tax return. Therefore, non-residents are required to file a Canadian income tax returns whether the waiver is approved or denied.
Sharon: Can you tell us what the obligations of a payer may be?
Shabnam: A payer is obligated to withhold and remit Reg 105 tax and also report the payments and withholdings on a T4A-NR information slip. Any amounts withheld from payments must be remitted to the Receiver General by the 15th of the next month. The T4A-NR slip and the information return must be filed with the CRA by the last day of the February of the following year.
Sharon: Shabnam, what happens if a payer does not withhold the required amount of tax?
Shabnam: If a payer fails to withhold the amount required under the Reg 105, he can be held liable for the whole amount along with the interest and penalties.
Sharon: Thanks for enlightening us on the Regulation 105 issues. I would like to move on to the Regulation 102 issues. What exactly are the tax withholdings applicable to non-resident employees?
Shabnam: Under Income Tax Act, Section 153 sub(1) and Regulation 102 the employers are required to withhold and remit income tax, Canadian Pension Plan (CPP) contributions and Employment Insurance Premiums (EI) for each of their employees. As mentioned in the previous podcast, the applicable withholding and remittance of tax and payroll reporting is required from the first workday.
Sharon: Does this apply also to the companies that are not resident in Canada?
Shabnam: Great question Sharon. The answer is yes and this is the crux of the issue as many foreign employers are not aware of these obligations. Specifically, the Reg 102 withholding requirements are applicable to all resident and non-resident employers having employees in Canada. Payments to non-residents of Canada who provide employment services in Canada are subject to the same withholding, remitting and reporting obligations similar to the Canadian resident employees.
Sharon: Is there any relief available under a tax treaty?
Shabnam: Similar to the Regulation 105 discussion, Canada does not relinquish its right to the withholding tax through income tax treaties; it is done through the waiver process. Even if the non-resident employee’s home country has a tax treaty with Canada, the employer, must still withhold and remit the applicable payroll taxes unless a waiver for reduced tax withholding has been filed and approved by the CRA.
Sharon: So there is again relief available under the Canada-U.S. tax treaty?
Shabnam: That is correct, a Reg 102 waiver will be granted to a US resident employee if either:
When the taxable income of a US resident employee providing services in Canada is less than $10,000 then with the consent of the employee, the employer can file a Form R102-J. It is a joint employer and employee form.
Sharon: Now what about the perhaps more common situation when the taxable income of a US resident employee providing service in Canada is greater than $10,000?
Shabnam: Well, in this situation, assuming he is exempt under the Canada-US tax treaty, the non-resident employee can apply for a waiver for the reduced tax withholdings by filing form R102-R with the CRA 30 days prior to the employment services being performed in Canada or before the initial payment is made. A waiver application must be approved by the CRA before any tax withholdings can be reduced, as it is not applicable on retroactive basis. When the waiver is approved then the employer can reduce the required Reg 102 tax withholding and remittances in Canada.
Sharon: Shabnam, can you tell us what the non-resident employer’s reporting obligations are when the waivers for the reduced tax withholdings have been approved by the CRA?
Shabnam: Regardless of the eligibility of the tax treaty relief, payroll tax compliance and reporting still apply. The non-resident employer is required to issue T4 slips and file a T4 Summary return reporting all amounts paid to their employees whether or not a waiver was received from the CRA. The T4 slips and Summary return are to be filed with CRA by the last day of February of the following year. Employees both resident and non-residents must be provided with a copy of their T4 information slip by the last day of February as well.
Sharon: Does that mean the non-resident employee who is exempt under the treaty is required to file a Canadian income tax return?
Shabnam: The CRA has commented that a non-resident employee is not required to file a Canadian income tax return if no Canadian tax is payable in that year. So, if the individual only has treaty exempt income and a waiver was approved by the CRA and consequently no taxes are due, then that individual should not have to file a Canadian income tax return.
Sharon: So, Shabnam, in a worst case scenario, what happens if the employer fails to withhold and no waiver has been approved by the CRA?
Shabnam: Well, if an employer, whether resident or non-resident of Canada, fails to deduct and remit an amount required under the Income Tax Act and Reg 102 it can be held liable for the whole amount owing along with interest and penalties.
Sharon: Is there anything non-resident employers can do that will help them to be compliant with the payroll withholding and reporting obligations in Canada?
Shabnam: There are few processes that they can implement that can help employers to be compliant, such as:
Companies should also consider what to do about prior years. Our last podcast in this series will address Canada Revenue Agency’s Voluntary Disclosure Program.
Sharon: Thank you for taking us through this detailed discussion on Regulations 105 and 102 Shabnam.
Shabnam: My pleasure Sharon.
Sharon: Shabnam’s contact details are available on our PwC podcast website www.pwc.com/ca/taxtracks.
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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.