From time to time we receive enquiries from non-resident individuals who have worked temporarily in Canada and are unsure of how they will be treated for tax purposes here as a result of their non-resident status. Often these individuals are former residents of Canada who are overtly familiar with Canadaís relatively high tax rates and are concerned with being taxed in Canada, particularly in cases where they are living in low or no tax jurisdictions.
Depending on the particular circumstances, a number of different issues may arise as a result of an individual working temporarily in Canada - for both the individual and the foreign employer. In this article we will discuss some of the more common issues that may arise as well as the potential Canadian filing requirements.
This article should not be taken as specific tax advice and we strongly recommend that you obtain assistance from a competent tax pro-fessional that is familiar with international tax issues prior to acting on any information provided in this article. We also strongly recommend that such assistance be obtained prior to commencing employment in Canada in case there is any planning that can be done to mitigate the overall worldwide tax liability.
In the first scenario, we discuss the tax implications for a non-resident employee who is temporarily transferred to Canada by their employer.
Under Canadian tax legislation, non-residents are taxable in Canada on any employment duties performed in Canada. However, provided that the individual is resident in a country with which Canada has negotiated a tax treaty, the taxability will largely depend on the wording of the relevant tax treaty. In most of Canadaís tax treaties, employment exercised in Canada will be subject to tax in Canada unless certain criteria are met. These criteria are usually based on the number of days the individual will have spent in Canada; the amount of remuneration the employee will receive for the Canadian working days; who is paying the remuneration; and whether some or all of their remuneration is borne by an entity which is taxable in Canada.
If the employee does not meet the criteria to exempt the income from Canadian taxation, the individual will be taxable in Canada on their Canadian source employment income and may be required to file a Canadian non-resident tax return to report this income. Where tax is payable in Canada, the individual will, in some cases, receive a foreign tax credit to reduce the tax payable in the foreign country where they are residing, up to the amount of tax payable on the same amount of income in the foreign country. This may depend on whether Canada has a tax treaty negotiated with that country. In cases where the individual is resident in a country with which Canada does not have a tax treaty, they will be taxable on any employment exercised in Canada without regard to these criteria which in some cases could result in double taxation. Fortunately, Canada does have numerous tax treaties in place with countries throughout the world so that it is often possible to avoid this potential double taxation.
It is important to note that different criteria may apply to individuals employed on a ship/aircraft, individuals employed as artists, entertainers or athletes, and individuals employed in Government service all of which are beyond the scope of this article.
Professionals and Self-employed Individuals
In the second scenario, we discuss what the tax implications are where a professional or self-employed individual temporarily performs professional or other business activities in Canada.
Under Canadian tax legislation, non-resident professionals and other self-employed individuals are generally subject to tax in Canada if they carried on a business in Canada. In some cases, exemption from tax in Canada on business activities may be available under one of Canadaís tax treaties with the home country provided that certain criteria are met.
Also, depending on the taxable status of the revenue earned by the individual for Canadian Goods and Services Tax (GST) purposes, GST registration and collection may be required if they are seen to be carrying on business in Canada. These requirements are beyond the scope of this article but should be considered prior to commencing work in Canada.
Further, anyone (Canadian or non-resident individual or employer) paying a fee, commission or other amount to a non-resident in respect of services rendered in Canada is required to withhold and remit a 15% tax on behalf of the non-residentís potential tax liability in Canada. However, provided that the individual is resident in a country with which Canada has negotiated a tax treaty, the ultimate taxability will largely depend on the wording of the relevant tax treaty. In some cases, it is possible to recover the tax withheld provided that the individualís Canadian tax liability is less than the 15% tax withheld. In Quebec, an additional 9% tax may also be withheld on account of the potential Quebec tax liability and again this may be recoverable in cases where the Quebec liability is less that the 9% tax withheld.
Under most of Canadaís tax treaties, professional services and other self-employed business activities performed in Canada will be subject to tax in Canada unless certain criteria are met. These criteria are usually based on whether the individual had a fixed place of business available to them in Canada; the number of working days the individual will have in Canada; the amount of fees the individual will receive for the Canadian working days; and whether the fees are borne by an entity which is taxable in Canada.
If the individual does not meet the criteria to exempt the income, the individual will be taxable in Canada on their business activities carried on in Canada and will be required to file a Canadian non-resident tax return even if no tax is payable or the income is exempt under a tax treaty. Where tax is payable in Canada, the individual will, in some cases, receive a foreign tax credit to reduce the tax payable in the foreign country where they are residing, up to the amount of tax payable on this same amount of income in the foreign country. This may depend on whether Canada has a tax treaty negotiated with that country. In cases where the individual is resident in a country with which Canada does not have a tax treaty, they will be taxable on business activities carried on in Canada without regard to these criteria which in some cases could result in double taxation.
Deemed Residents of Canada
Where a non-resident employee, professional or other self-employed individual sojourns in Canada in a taxation year for a period of 183 days or more, the individual will be deemed to be a resident of Canada under Canadian tax legislation. Further, certain individuals in special employment circumstances which are beyond the scope of this article may also be deemed residents of Canada. Therefore, unless the individual is considered a resident in another country under a particular tax treaty with Canada, that individual will be considered taxable in Canada on their worldwide income.
Impact on Non-resident Employers
We have addressed the potential tax issues that non-resident employees will face so we will now briefly outline some of the potential Canadian tax implications to the individualís non-resident employer.
To begin with, the non-resident employer may be seen to be carrying on business in Canada as a result of the activities performed by the non-resident employee. At a minimum, this may necessitate the filing of a Canadian tax return by the non-resident employer even if the income is exempt from tax under a tax treaty with Canada, or in other cases where no tax is otherwise payable.
Further, a non-resident employer may be subject to a 15% withholding tax on any fees, commission or other amounts received in respect of services rendered by their non-resident employee in Canada on account of their potential liability for Canadian tax. A further 9% withholding may be levied by the province of Quebec where the services are performed there. It may be possible to recover this tax by filing a tax return in cases where the ultimate tax liability is less than the tax withheld.
The foreign employer could also be seen to be carrying on business for Canadian GST purposes based on the activities of the non-resident employee in Canada such that GST registration and collection may be required depending on the taxable status of the revenue earned for Canadian Goods and Services Tax (GST) purposes.
Further, a foreign employer is generally required to withhold and remit Canadian income tax, Employment Insurance (EI) and Canada Pension Plan (CPP) contributions on behalf of their non-resident employee for services performed in Canada unless a waiver has been obtained beforehand. In this case, the non-resident employer will also be required to file and provide the non-resident employee with a T4 (Statement of Remuneration Paid) in respect of the services performed in Canada.
We have attempted to summarize in general terms the potential tax issues faced by non-residents working in Canada and their foreign employers. With advance planning, it is usually possible to eliminate or at least minimize a non-residentís exposure to Canadian tax. It should be noted that individual circumstances can vary significantly and Canadaís tax treaties also differ from country to country. As a result, it is not possible to cover every possible scenario in this article so we encourage you to speak with a compent tax professional for advice specific to your situation.