Payroll Withholding Relief May Cause Sales Tax Pain

Although it is widely accepted that the new payroll withholding relief available to certain non-resident employers that send employees to Canada on a short-term basis is beneficial in many circumstances, the CRA could use the information provided to determine that the non-resident is carrying on business in Canada. In one situation, the CRA appeared to use the presence of an employee in Canada for 21 days or more to make that determination.

GST/HST registration is generally required of a non-resident only if the non-resident is carrying on business in Canada. The concept of “carrying on business” is not defined in the ETA, and GST/HST Policy Statement P-051R2, “Carrying On Business in Canada,” says that this determination must be made on a case-by-case basis and requires judgment. Twelve separate criteria are listed, one of which is the place where services are performed.

When a qualifying non-resident employer seeks to send qualifying non-resident employees to Canada without the requirement to withhold income taxes, the CRA requires the provision of certain information in the application for certification (see “Regulation 102 Withholding Relief for Non-Resident Employers,” Canadian Tax Highlights, March 2016). On form RC473, “Application for Non-Resident Employer Certification,” question 18 asks the non-resident employer, “Are you sending employees to Canada with respect to a contract you have to provide services in Canada?” A “yes” answer could trigger an inquiry from the CRA asking how many days the employees are providing services in Canada, which in turn could lead to a determination that the employer is carrying on business in Canada, based on the criterion noted above regarding the place where services are performed.

This is precisely what happened in one particular situation of which I am aware. Further, the CRA agent appeared to use a previously undisclosed administrative guideline based on the question 18 response to make this determination: a non-resident that sends employees into Canada for 21 days or more is considered to have provided services in Canada for a significant period of time, indicating that the employer is carrying on business here. I see no basis for the use of this single-factor, highly specific criterion; 12 factors are listed in the policy statement cited above, and the case law developed for income tax (which should be relevant in the absence of an ETA definition) does not support the CRA’s conclusion.

Such a carrying-on-business determination can have a significant impact, since many non-residents conduct their activities in Canada without registering for the sales tax. A requirement to register, possibly imposed unilaterally by the CRA (under ETA subsections 241(1.3) to (1.5)), might cause the non-resident to have to change its invoicing systems and be thrown into a whole new sales tax system with additional collection, remittance, and reporting requirements with which it has no experience. In the worst-case situation, the non-resident could be assessed for tax not collected, interest, and penalties. Also, there may be instances where the tax due is not recoverable—for example, when a customer agreement states that consideration is “tax-included, if applicable.”

One possible response in this situation is to request a GST/HST ruling based on the taxpayer’s presence and ongoing activities in Canada and the sales tax implications of the taxpayer’s situation. This response might be appropriate if the exposure is material and the conclusion is unclear. However, if the facts of the situation change, the GST/HST ruling may no longer be valid.

Grace Caputo
Grant Thornton LLP, Mississauga

Canadian Tax Focus
Volume 6, Number 4, November 2016
©2016, Canadian Tax Foundation