2015 Federal Budget Proposes Regulation 102 | KPMG | CA

2015 Federal Budget Proposes Regulation 102 Withholding Tax Exception

2015 Federal Budget Proposes Regulation 102

Global Tax Advisor. The 2015 federal budget proposes an exception to the withholding requirements under Reg. 102.

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The 2015 federal budget proposes an exception to the withholding requirements under Regulation 102 for payments made after 2015 by non-resident employers to non-resident employees where certain conditions are met.

To qualify for the exception, the non-resident employee must meet the exemption criteria under a tax treaty and must not be in Canada for 90 days or more in any 12-month period that includes the time of the payment. As well, the employer must be resident in a country with which Canada has a tax treaty (or in the case of a partnership, at least 90% of its income for the fiscal period that includes the time of payment must be allocated to persons that are resident in a treaty country). In addition, the employer must not carry on business in Canada through a Canadian permanent establishment of the employer, and must be certified by the CRA at the time of payment.

While the proposed change to the regulation 102 withholding requirements may benefit companies with low cross-border employee travel, there may still be some administrative burdens for larger corporations and those with complex international structures.

Background

Employers (including non-resident employers) are required to withhold and remit Canadian tax on employment income earned in Canada by a non-resident employee, regardless of whether that income is exempt from Canadian tax because of a tax treaty. Under the terms of many of Canada's tax treaties, non-resident employees are generally not required to pay tax in Canada if the number of their working days in Canada, or the total remuneration they earn in Canada, is relatively nominal. For example, a U.S. resident employee will generally be exempt from Canadian tax if the remuneration does not exceed CDN $10,000 or if the employee is present in Canada for no more than 183 days in any 12-month period commencing or ending in the relevant calendar year and if the remuneration is not borne (i.e., not deductible as an expense) by a permanent establishment in Canada. The requirement to withhold and remit Canadian tax on remuneration paid to non-resident employees that would otherwise be exempt from Canadian tax places an unnecessary administrative burden on employers engaged in cross-border business.

An employer may be able to obtain a waiver from the CRA to be relieved from its obligation to withhold tax on remuneration paid to a particular employee. However, the existing waiver system has been criticized as being inefficient because a separate waiver is required for each particular employee and applies only for a specific time period, often prior to travel occurring.

KPMG observations

It appears that the budget proposals affecting Regulation 102 do not relieve employers or employees from their reporting requirements (i.e., wage reporting on T4 slips for employers and personal tax return filings for employees). In addition, further clarity may be required on how the eligibility criteria may be applied.

90-day test

For example, it is unclear how the 90-day rule will apply where an employee's travel to Canada straddles two calendar years or occurs over multiple trips. Consider the following examples:

  • A U.S. employee travels to Canada throughout November and December of Year 1 (i.e., less than 90 days in Year 1). That employee remains in Canada through to the end of the first week of February of Year 2, such that total time spent in Canada is more than 90 days. In this case, it is unclear at what point withholding tax will become applicable (i.e., whether the employer will have to retroactively withhold in respect of remuneration paid in Year 1). As well, it is unclear whether the employer and employee have a reporting requirement for both Year 1 and Year 2.
  • A U.S. employee spends 80 days in Canada in January of Year 1 and subsequently spends another 20 days in Canada on another trip in December of Year 1, such that the total number of days in Canada in Year 1 exceeds 90. Again, it is unclear when the withholding tax will become applicable and whether the CRA will apply penalties for unremitted withholding tax for the first trip.

Furthermore, taxpayers may have to reconfigure their payroll and HR systems to track the 90-day requirement over rolling 12-month periods.

Permanent establishment test

To qualify for the proposed exception, an employer must not carry on business in Canada through a Canadian permanent establishment of the employer. The concept of permanent establishment can be complex. Many treaties include a deeming rule which deems an entity of one country to provide services through a permanent establishment in the other country where either of two tests are met. For example, under Article V(9) of the Canada-U.S. treaty, an entity is deemed to have a permanent establishment in Canada if the services are provided in Canada for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are Canadian residents or have Canadian permanent establishments.

Consider a situation where a U.S. resident employee travels to Canada for 80 days and, later in the same year, another U.S. resident employee travels to Canada for 105 days to work on the same project. Since the 183-day test under the treaty's permanent establishment deeming rules has been met, a Regulation 102 issue has been created even though only one employee has been present in Canada for more than 90 days, and presumably now creates an issue for the employee who traveled less than 90 days originally. The Regulation 102 relief requirement that there be no permanent establishment in Canada imposes an added complexity by having to track days spent by multiple employees on a particular project over various start and end dates.

Certification

To qualify for the exception, the employer must be certified by the CRA. The details of the certification process are not yet available.

For more information, contact your KPMG adviser.

Information is current to May 05, 2015.

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