Accessing Statute-Barred Corporate Refunds Through Employee Refunds: Regulation 102

Most cross-border tax advisers will be well aware of the administrative burden that regulation 102 imposes on non-resident taxpayers that send employees to Canada. However, they may not be aware that such payroll withholding obligations can provide an opportunity for the employer to access corporate income tax refunds that would otherwise be unavailable due to a failure to file corporate tax returns on a timely basis.

Subsection 164(1) of the Act provides that a refund may be issued to a taxpayer in respect of a particular taxation year only if the tax return for that year has been filed within three years of the applicable year-end. This little-known restriction presents particular challenges for non-resident taxpayers that are subject to a 15 percent withholding tax on amounts paid by their customers for services provided in Canada pursuant to regulation 105. Because many non-residents mistakenly assume that the regulation 105 withholdings represent a final tax, they often do not file Canadian tax returns to obtain a refund that they might be entitled to, particularly if they are exempt from Canadian income tax by virtue of an applicable treaty. As noted above, however, even if this error is later brought to the non-resident’s attention, the fact that no tax return will have been filed within the three-year time limit may mean that these funds are permanently lost.

In “Accessing Statute-Barred Refunds” (Canadian Tax Highlights, September 2014), Marlene Cepparo wrote that section 221.2 of the Act permits taxpayers to apply to the CRA to have corporate income tax refunds reappropriated to fund other types of liabilities. While many non-resident taxpayers may believe that they have no other Canadian liabilities and that this provision is therefore not relevant for them, the fact that they have provided services in Canada necessarily means that they have sent employees to Canada to render those services and that the payroll withholding obligations imposed under regulation 102 have been applicable. Therefore, otherwise statute-barred corporate income tax refunds may be re­appropriated to fund these payroll withholding obligations.

If the employer is exempt from Canadian income tax pursuant to the provisions of a treaty, non-resident employees will often also be exempt from Canadian personal income tax, provided that they have spent less than 183 days in Canada in a 12-month period (for example, article XV of the Canada-US treaty). Therefore, these employees should be entitled to obtain personal refunds by filing personal tax returns. The key to the success of this arrangement is that for taxpayers who are individuals, subsection 164(1.5) (part of the taxpayer relief provisions) extends the subsection 164(1) time limit for filing the tax return that generates the refund from 3 years to 10 years.

The refund should rightfully belong to the employer who funded it with the reappropriated corporate refund. Thus, employees may reasonably be expected to pass on these savings to the employer as, essentially, the repayment of a short-term loan. Foreign tax provisions may need to be analyzed in order to verify whether this temporary loan constitutes a taxable benefit to the employee. It would be helpful to document this transaction by having the employee sign a loan agreement.

Both stages of this procedure—the reappropriation of corporate refunds and the payment of refunds to individuals beyond the three-year period—are not automatic and are subject to ministerial discretion. One positive sign is that the reappropriation aspect does not contravene the specific limits noted in CRA document no. 2011-0410961I7 (January 13, 2011).

Mark Dumalski
Deloitte LLP, Ottawa
mdumalski@deloitte.ca

Canadian Tax Focus
Volume 5, Number 4, November 2015
©2015, Canadian Tax Foundation