Regulation 102 of the Income Tax Act (“ITA”) requires payroll withholding on income derived by virtue of employment. This applies to say a U.S. employer sending its employee to Canada to work on an assignment.
Withholding would include income tax and contributions to the Canada Pension Plan (“CPP”) and Employment Insurance (“EI”).
CPP is not required if the employer does not have an establishment in Canada or if the employee has a certificate of coverage under the U.S. social security agreement between Canada and the country of residence. The certificate is not required if the employee will be in Canada for less than 183 days. EI premiums are not required if the employee is covered under a similar program in the country of residence.
Changes arising from the 2015 Federal Budget designed to simplify the process now provides for 2016 that it is not necessary for the employee to apply for a waiver provided the employer files CRA Form RC473 “Application for Non-Resident Employer Certification”.
The form should be submitted to CRA 30 days prior to commencement of the services being provided. The waiver is not in effect until approval is provided by CRA. The employer must obtain a business identification number by filing RC59 and the employee must also obtain in identification number by completed RC1261. CRA T4Sum/Sup. must be filed and the employee must file a personal tax return under Section 115 of the Income Tax Act (“ITA”) reporting the income due by April 30th.
Definitions for non-resident employer and employee
A “non-resident employer” and a “non-resident employee” have specific definitions for purposes of the waiver.
The employer must be resident in a treaty country at the time of the payment or if the employer is a partnership, at least 90% of the partnership’s income is allocated to non-resident partners who are resident in a treaty country, and the Minister certifies the RC473.
The employee must be resident in a treaty country at the time of the payment and is not liable to income tax under Part I of the Income Tax Act on the payment because of the tax treaty. Additional criteria are that the employee either works in Canada for less than 45 days in the calendar year that includes the time of the payment, or is present in Canada for less than 90 days in any 12-month period that includes the time of the payment.
As part of the certification process, a qualified non-resident employer must refer to the tax treaty to determine the existence of the tax exemption and determine that the employee is a qualified non-resident employee in all respects.
Treaty Application with respect to RC473
With regards to the United States, Article XV(2(a)/2(b)) will determine if the non-resident employee is exempt from Canadian taxation.
If the income is under $10K Cdn. for the services provided in Canada, the income is exempt from taxation. However, if the income is over $10K Cdn., then only if the employee is not present in Canada for more than 183 days in any 12-month period commencing or ending in the calendar year and the wages are not deducted in arriving at taxable income of the payor or an entity that has carries on business through a permanent establishment situated in Canada.
Therefore if the wages attributable to the Canadian services is more than $10K regardless of the foregoing 183-day rule, but the U.S. employer who pays the wages has a permanent establishment in Canada say through a branch operation and deducts those wages as an expense in arriving at taxable income allocated to business profits to Canada, or, if the wages are paid on behalf of a Canadian entity (ie.,subsidiary of the U.S. company) through a cross border management fee charged to the Canadian entity, there would be no treaty exemption hence no waiver allowed.
What if RC473 is not filed?
If the RC473 is not filed, the employee may file for a waiver by completing CRA Form R102-R. With regards to this particular waiver, residents of the U.S. must not receive more than $10K Cdn. The limit is $5KCdn. for residents of other treaty countries.
Which waiver RC473 by employer certification or R1025-R employee certification.
Obviously the RC473 requires the employer’s due diligence with regards to the treaty, the employee’s travel and especially, where the income is over $10KCdn.
Should it be determined that for income in excess of $10KCdn. and the employer does in fact carry on business in Canada through a permanent establishment situated therein, penalties for failure to withhold and remit will apply. It is possible that this aspect could hold up the waiver approval process.