Tax Insights: Recent CRA practices deny Regulation 102 waiver requests

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Issue 2013-10

Recent Canada Revenue Agency (CRA) practices have made it difficult for some non-resident employees working in Canada to obtain CRA waiver approval.

The CRA has acknowledged denying Regulation 102 waiver applications completed on Form R102-R, in respect of an employee’s Canadian workdays, if there is a possibility that the foreign employer has a permanent establishment (PE) in Canada. In addition, when a Regulation 105 waiver is denied under the ‘days threshold’ test, any Regulation 102 waiver applications related to that project are likely to be denied too. The CRA has indicated that further guidance may be released late September 2013 on these matters.

Payments to non-residents of Canada who provide employment services in Canada are subject to the same withholding, remitting and reporting obligations as those for Canadian-resident employees, as Regulation 102 requires.

Even if the employee’s country of residence has an income tax treaty with Canada that exempts his or her income from tax in Canada, the employer must still withhold and remit applicable payroll taxes from the employee, unless the employee has received a Regulation 102 waiver from the CRA. If no waiver is obtained, the tax withheld may still be refundable after the employee files an income tax return.

Payments to non-residents of Canada for services performed in Canada are subject to a 15% withholding, to be remitted to the CRA by the payer, under Regulation 105. This tax is refundable if the non-resident files an income tax return and does not have a PE in Canada.

To avoid the 15% withholding, the non-resident must obtain, in advance of the payment, a valid Regulation 105 waiver from the CRA. In determining if a waiver will be approved, the CRA applies a ‘240 days’ test, which counts the calendar days on which the non-resident had at least one employee or subcontractor physically in Canada to render services over a seven-year span (starting three years before the current year). If that total exceeds 240 days, the Regulation 105 waiver typically will be denied.

The CRA has stated that, generally, waiver officers in the Tax Services Offices will deny Form R102-R waiver applications if they suspect that a foreign employer has a PE in Canada in respect of the work the employee will be doing.