Non-Resident Employees: Withhold on Worldwide Income?
ITA regulation 102 requires employers to withhold tax on remuneration
paid to non-resident employees who are employed in Canada. This
requirement can be avoided by seeking a treaty-based waiver
(regulation 102 waiver) or certification as a qualifying non-resident
employer. However, often there is not sufficient time to do this before
the employment is to begin, or there is a lack of awareness of the
rules. Where the employer must withhold tax, should the amount be based
on the non-resident employee's Canadian income or worldwide income?
Clarification from the CRA would be appreciated.
Specifically, regulation 102 imposes withholding on "any payment of
remuneration . . . made to an employee in his taxation year. . . ." The
definition of "remuneration" under regulation 100(1) does not specify
that the remuneration is only in respect of Canadian employment.
Accordingly, a cross-border non-resident employee who is employed in
Canada for 5 percent of his or her workdays could technically be subject
to Canadian withholding tax on all worldwide remuneration, in addition
to withholding tax in his or her country of residence. Of course, this
excess Canadian withholding would be refunded after the employee files a
T1 tax return.
Subparagraph 115(1)(a)(i) specifically limits the taxable employment
income of a non-resident person earned in Canada to "incomes from the
duties of offices and employments performed by the non-resident person
in Canada." Thus, the person is not liable for tax on non-Canadian
income. One might extend this argument to withholding and therefore not
withhold tax on such income, on the basis that the regulations should be
interpreted in the entire context of the scheme and object of the Act.
Thus, in practice, the withholding amount is generally calculated in
accordance with this principle by multiplying the non-resident
employee's annual remuneration by the number of days worked in Canada
divided by the total number of working days that year. Commentators have
generally recommended this approach; see, for example, "Regulations 102
and 105 and Cross-Border Compliance Issues" in the Canadian Tax
Foundation's 2013 annual conference report.
The difficulty is that the CRA has not explicitly endorsed this approach, except in narrow circumstances. Guide T4001
the "Employers' Guide—Payroll Deductions and Remittances," suggests
that non-resident directors who attend meetings in Canada are subject to
Canadian income tax and withholding based on the number of working days
they spend in Canada in relation to the total days they worked overall.
Similarly, in respect of a non-resident employee stock option plan, the
CRA suggests calculating an employee's taxable Canadian income by
multiplying the total benefit derived by the proportion of working days
spent in Canada over the total number of working days that year (CRA
document no. 2012-0440741I7, July 6, 2012).
Employers looking to avoid being assessed penalties for underwithholding
would appreciate more general assurance that only Canadian income of
non-resident employees is subject to withholding.
Carl P. Deeprose and Travis Bertrand
Norton Rose Fulbright Canada LLP, Toronto
Canadian Tax Focus
Volume 9, Number 2, May 2019
©2019, Canadian Tax Foundation