Thinking beyond borders
Liability for Canadian tax is determined by an individual’s residence status. A person can be a resident or a non-resident for Canadian tax purposes.
Individuals resident in Canada are subject to Canadian income tax on their worldwide income and allowed a credit or deduction for foreign taxes paid on income derived from foreign sources. There are no specific Canadian tax rules for determining whether or not an individual is resident in Canada. The law is based on jurisprudence and Canada Revenue Agency (CRA) administrative practice. Each case is determined on its own merits.
By commencing long-term or permanent employment, acquiring a dwelling, moving one’s family into the country, and establishing residential and social ties (such as acquiring bank accounts, club memberships, or a driver’s license), an individual may establish residence in Canada at a specified point in time. Residence is also established by virtue of the taxpayer’s intent to remain in Canada. Where residence is established by particular events, individuals are taxed as residents for one part of the year and as non-residents for that part of the year that precedes residency.
An individual may also be considered a deemed resident taxpayer if the individual is present in Canada for more than 183 days in a calendar year. As a deemed resident, the individual is subject to tax on worldwide income. Tax relief may be available if the individual is also a resident of another country with which Canada has a tax treaty.
Non-resident individuals who are employed in Canada, who are carrying on business in Canada, or who have disposed of taxable Canadian property are also subject to regular Canadian income taxes. Income earned in Canada from property and certain other sources, such as dividends, rents, and royalties, is subject to a federal tax imposed at a flat rate of 25% (which may be reduced under the terms of an applicable tax treaty) that is withheld. There is no withholding on Canadian interest earned by non-residents.
Extended business travelers are likely to be considered non-residents of Canada for tax purposes unless they enter Canada with the intention to remain for more than 6 months.
Employment income is generally treated as Canadian-sourced compensation where the individual performs the services while physically located in Canada. Directors are considered officers of the employer and any remuneration for their duties is considered employment income.
Technically, there is no threshold or minimum number of days that exempts the employee from the requirements to file and pay tax in Canada. To the extent that the individual qualifies for relief in terms of the income from the employment article of the applicable double tax treaty, there will be no tax liability. The treaty exemption will not apply if the Canadian entity is the individual’s economic employer.
The treaty exemption does not relieve a person from the obligation to file a Canadian income tax return. Similarly, an employer has a payroll reporting and withholding obligation for payments to an individual for services rendered in Canada. The withholding obligation can be eliminated if the employer or employee obtains a withholding waiver from the CRA.
If an extended business traveler is considered a non-resident, they will generally be taxed on income derived from certain specific sources in Canada, such as:
Employment income is taxable when received, or when the individual is entitled to receive it, if earlier. Employment income is subject to tax to the extent that it was earned during a period of Canadian residence, or in the case of income earned while non-resident, to the extent it was earned in respect of duties performed in Canada.
Net taxable income is taxed at the federal level using graduated rates ranging from 15 percent to 33 percent, both for residents and non-residents. The maximum federal tax rate is currently 33 percent on income earned over 200,000 Canadian dollars (CAD).
The provinces (except Québec) use the taxable income calculated for federal tax purposes, but apply their own tax rates and tax brackets to that income figure. The provinces also set their own non-refundable and refundable tax credits.
The CRA administers both federal and provincial taxes (except Québec's), thus, taxpayers calculate their federal and provincial taxes on one return (other than if the taxpayer is subject to Québec tax, which will require the taxpayer to file both a Federal return and a separate Québec tax return). Provincial tax is computed in essentially the same way as federal tax, but applying the applicable province’s tax brackets, rates, and credits to taxable income. Québec also has several differences in the treatment of some types of employment income and some types of deductions.
The provinces decide upon their own graduated rates and thresholds used in calculating the applicable provincial income tax. Currently, the rates range from 4 percent to 25.75 percent. In addition, two of the provinces (Ontario and Prince Edward Island) apply surtaxes.
The maximum combined federal and provincial rates range from a low of 44.50 percent for Nunavut to a high of 58,75 percent for New Brunswick.
Non-residents are subject to the same federal and provincial tax rates as residents. An additional tax of 48 percent of the federal rate is applicable, however, (in lieu of provincial tax) on income that may not be allocated, because of regulation, to a province.
Canada has an extensive social security system that confers benefits for disability, death, family allowances, medical care, old age, sickness, and unemployment. These programs are funded mainly through wage and salary deductions and employer contributions.
An employee’s responsibility is made up of two parts: Canada Pension Plan (CPP) and Employment Insurance (EI). Fifteen percent of the contributions made by an employee to CPP or EI are creditable against that individual’s federal income tax liability. The contributions are also creditable for provincial tax purposes.
|Canada Pension Plan||4.95%||4.95%||9.90%|
Source: KPMG in Canada, 2016
CPP must be deducted from an individual’s remuneration if the individual is employed in Canada (other than in the province of Québec), between the ages of 18 and 70, and receiving pensionable earnings. The employer is responsible for withholding and remitting the individual portion and remitting the matching employer portion to the tax authorities. The maximum employee and employer contribution for 2016 is CAD2,544 each. Individuals working in Québec contribute to the Québec Pension Plan (QPP) instead of the CPP program.The maximum employee and employer QPP contribution for 2016 is CAD2,737 each.
If the employee is transferred from a country that has a social security agreement with Québec and/or the rest of Canada, the employer may request a certificate of coverage from the other country to exempt the compensation from CPP and/or QPP.
EI must be deducted from an individual’s remuneration if the individual is employed in Canada and is receiving insurable earnings. There is no age limit for deducting EI premiums.
Like the CPP contribution, the employer is responsible for withholding and remitting the individual’s portion as well as remitting the employer portion (1.4 times the individual contribution) to the tax authorities. The maximum employee contribution limit for 2016 is CAD1955, with a corresponding employer contribution limit of CAD1,337.
CPP and EI are assessed based on earnings, and the rates are adjusted each year based on actuarial calculations prepared by the federal government and, for QPP, the Québec government.
Canada has entered into formal social security totalization agreements with over 50 countries to prevent double taxation and allow cooperation between Canada and overseas tax authorities in enforcing their respective tax laws. Québec has entered into separate social security agreements with various countries as well. Care should be taken by employers to obtain certificates of coverage under the Social Security Agreement between an employee's country of regular coverage and the relevant Canadian government (i.e. Federal or Québec) based on where the employee will be working Canada before the commencement of any assignment in Canada.
Tax returns are due by 30 April following the tax year-end, which is 31 December. There are no provisions for extensions to this deadline. Late-filing penalties and interest are generally based upon unpaid taxes, although penalties can also be assessed on certain late-filed information forms.
The Canadian tax system is a self-assessment system. Individuals are required to determine their own liability for income taxes and file the required returns for any taxation year in which taxes are payable. Individuals file their own tax returns; spouses do not file jointly.
A non-resident employee is required to file a Canadian income tax return by 30 April following the tax year to report compensation and compute the tax, or claim an exemption pursuant to an income tax treaty. The income taxes withheld are applied as a credit in calculating the final tax liability for the year. To facilitate filing a return, the employee must apply to the CRA for a Canadian Social Insurance Number or in the event that they are not eligible for a Social Insurance Number, an Individual Tax Number. A return is recommended even if the income is exempt from taxation pursuant to the provisions of an income tax treaty.
Employers are required to report, withhold, and remit withholding tax for each of their employees unless a waiver of withholding tax has been issued by CRA (and by Revenue Québec in respect of Québec tax withholdings). As a technical matter, even short business trips to Canada are subject to payroll withholding unless a waiver has been obtained. These requirements apply even if the employer is a foreign company that does not have a PE in Canada.
The payroll withholding is not the final tax. The income taxes withheld are applied as a credit in calculating the final tax liability for the year. Any additional taxes owed must be paid by 30 April to avoid late payment penalties.
Immigration, Refugees and Citizenship Canada's ("IRCC") Program Delivery Instructions set out the main immigration categories available to foreign nationals seeking to work temporarily in Canada.
In certain circumstances, foreign workers may be granted entry as a business visitor if they are performing activities, which are, by regulation, exempted from requiring a work permit. The legal evaluation of this determination involves assessing whether a foreign national is seeking to engage in international business activities in Canada without directly entering the Canadian labour market. The analysis as to whether a particular activity falls under this exemption is complex and particular care must be taken to err on the side of caution. For certainty, the use of legal counsel is recommended.
Prior to entering Canada, foreign workers may require a Temporary Resident Visa (“TRV”) in addition to a work permit, if their country of nationality is not included on IRCC's list of visa-exempt countries. A TRV is different from a Work Permit; it is a travel document that allows an individual to enter Canada, but does not confer any status on the individual.
If the worker requires a TRV, the application for the work permit must be made outside Canada at the requisite Canadian visa office (see http://www.cic.gc.ca/english/work/index.asp).
The TRV will be issued together with a letter approving the work permit. The actual work permit is issued at the port of entry.
If the worker is visa exempt, the application for the work permit can be made directly at the Canadian port of entry, upon entry to Canada. If the worker does not require a TRV to travel to Canada, an application for a work permit can be presented to an immigration official at the port of entry upon arrival to Canada. Alternatively, an application for an opinion on eligibility for work authorization or entry as a business visitor can be submitted to the International Mobility Worker Unit (IMWU). The opinion, upon issuance, can be presented to immigration officials at the port of entry with the application.
As of March 15, 2016, individuals that are visa exempt will be required to apply for, and obtain, Electronic Travel Authorization (eTA) prior to travelling to Canada. The eTA confirmation will be issued electronically; and in the majority of cases, may be approved within minutes. Cases that are submitted for further review will be subject to a service standard of 72 hours. During this time, CIC must provide an approval, refusal, request for additional information, or advise the foreign national that his or her application has been sent for additional screening. Applicants will apply via an online system and will pay a $7.00 processing fee per applicant, which is meant to recover the cost of the eTA system. The eTA will be valid for the lesser of five years from the day on which it is issued, or until the applicant's passport or travel document expires. If a foreign national obtains a new passport, a new eTA will be required before traveling to Canada.
If a foreign national has resided in a designated country for more than six months in the last year from the date an application is submitted, the applicant will be required to compete an immigration medical prior to entering Canada provided they are required to work in Canada for more than six months. All applicants seeking entry to work in Canada must be medically and criminally admissible. Where an applicant is medically or criminally inadmissible to Canada, it is possible to obtain a Temporary Resident Permit to allow entry to Canada, however such determinations often involve detailed legal assessments.
Where a worker is working within Canada and is required to extend the period of their authorized stay, they may make an application to the inland processing centre to obtain an extension. In making such an application foreign nationals must ensure that they continue to meet the requirements of the relevant category under which they are applying. As a general rule, foreign nationals are allowed to work in Canada for up to four (4) years; however, there are various exceptions that may permit an individual to work beyond the four-year maximum.
In many cases, an employer must first obtain a positive Labour Market Impact Assessment (“LMIA”) by submitting an application to Service Canada in the appropriate province before a Canadian immigration officer can issue a work permit. Subject to limited exceptions, in order to obtain an opinion, the prospective employer must conduct recruitment efforts on at least three forums for a minimum period of four weeks prior to filing the LMIA application and recruitment efforts must be ongoing for the duration of the processing of the LMIA, until a decision on the application is rendered.
If Service Canada determines that the proposed employment of the foreign national will have a positive or neutral impact on the Canadian labour market a confirmation will be issued, which a foreign worker can then use to apply for a work permit.
For multinational corporations, there are categories that allow employees to obtain a work permit without an LMIA, provided certain conditions are met and the proper documentation is presented. For example, intra-company transferees in senior executive or managerial capacities, as well as specialized knowledge workers may qualify for an LMIA exemption if they have been employed by the foreign entity for at least one continuous year, full-time, during the three years preceding the date of the work permit application. The one year of prior experience must have been obtained in a similar position to the one that is being offered to the foreign worker in Canada. The foreign entity must be related to the Canadian employer (e.g. affiliate, parent, subsidiary, or branch) and the employee must be employed by the home employer at the time of the application.
In the case of specialized knowledge workers, the reviewing officer must be satisfied that the employee holds both proprietary knowledge of the company’s product, service, research, equipment, techniques or management and knowledge at an advanced level of expertise. Proprietary knowledge is generally understood to be company-specific expertise related to a company’s product or services. An advanced level of expertise refers to specialized knowledge gained through significant and recent experience with the organization and used by the individual to contribute significantly to the employer’s productivity.
International treaties may also provide a way for an employee to obtain a work permit without an LMIA where the employee is a citizen of a country that is party to certain Agreements and is able to satisfy the prescribed eligibility criteria associated with a specific profession. For example, Citizens of the US and Mexico wishing to work temporarily in Canada may qualify for an LMIA exemption under certain provisions of the North American Free Trade Agreement (NAFTA) provided that the applicant can demonstrate the minimum educational requirements for an applicable professional occupation. Other special exemptions are available between participating nations of the General Agreement of Trades and Services (GATS), as well as other international agreements. Upon formal introduction, it is expected that the Comprehensive Economic and Trade Agreement between Canada and the European Union may offer a number of similar LMIA exemptions to EU citizens.
Normally, accompanying family members (or dependents) are not automatically allowed to work in Canada, and must first obtain a work permit before they can begin employment in Canada. There are, however, certain circumstances where a dependent spouse is able to obtain an open work permit, allowing the dependent to work for any employer in any location, and in any occupation other than childcare, healthcare or primary or secondary education – a medical examination is required to work in these three restricted fields. The duration of the work permit will equal the duration of the foreign worker’s permit. The use of legal counsel is recommended to determine whether any of the above-mentioned exemptions apply.
On December 31, 2013, substantive amendments to Canada’s Immigration and Refugee Protection Regulations (“IRPR”) were implemented which are intended to promote the integrity of Canada’s Temporary Foreign Worker Program (“TFWP”), by imposing greater compliance obligations on Canadian employers participating in the TFWP. The changes also provide immigration officials with extensive authority to investigate and penalize employers where they are found to be non-compliant with immigration laws or regulations.
Under the new Regulations, non-compliance exists where an employer fails to meet additional conditions imposed under the Regulations.
For example, every application for a LMIA submitted by an employer provides Service Canada with an opportunity to review compliance by that employer for the period beginning six (6) years before the day on which any LMO application is received by Service Canada. If a determination of non-compliance is made, and cannot be justified under regulations, the employer will be added to CIC’s ineligibility list and becomes unable to access the TFWP for two (2) years; no work permit applications, including pending matters will be processed during this time. The new regulations also permit immigration officials to complete onsite inspections to assess employer compliance with Canadian immigration laws and policies. Canadian immigration authorities have recently proposed an enhanced regulatory program to more effectively take action against non-compliant employers. Additional remedies include the introduction of administrative monetary penalties (AMP) and increased ban lengths of up to ten years preventing non-compliant employers from accessing the TWFP.
In addition to Canada’s domestic arrangements that provide relief from international double taxation, Canada has entered into double taxation treaties with approximately 90 countries to prevent double taxation and allow cooperation between Canada and overseas tax authorities in enforcing their respective tax laws.
A PE could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
The Canada/US income tax treaty has a provision, which became effective in 2010, that may result in a deemed PE, even if a PE does not otherwise exist. Under this provision, a deemed PE may result if a company in one country provides services in the other country for an aggregate of 183 days or more in any 12-month period, with respect to the same project or connected projects for customers who are resident of that other country or who maintain that other country for which the services are performed.
The federal goods and services tax (GST) applies at a rate of 5 percent to most goods acquired and services rendered in Canada. Five provinces have a harmonized sales tax (HST) that is comprised of a 5 percent federal component and a provincial component that varies by province. In Ontario, New Brunswick, and Newfoundland and Labrador, the HST rate is 13 percent. In Prince Edward Island, the HST rate is 14 percent. In Nova Scotia, the HST rate is 15 percent. New Brunswick proposes to increase its HST rate to 15 percent effective from July 1, 2016. Subject to few exceptions, the HST system is essentially the same as the GST system (e.g. tax base and mechanics).
In general, businesses (suppliers) that carry on business in Canada and make taxable supplies are required to collect and remit GST/HST on those taxable supplies. These businesses are generally entitled to claim offsetting input tax credits for GST/HST paid on their expenditures.
The word supply includes most forms of goods and services. The scope of the GST/HST is not restricted to the provision of goods and services by way of sale but also includes other types of transactions, such as leases and rentals, barter transactions, and the granting or assignment of a right.
Zero-rated supplies (e.g. qualifying basic groceries and exported goods) are also taxable supplies but are taxed at a 0 percent rate. Suppliers of zero-rated supplies are generally entitled to claim input tax credits for the GST/HST paid on their expenditures.
Taxable supplies do not include exempt supplies such as most healthcare services, financial services, and residential rentals. Suppliers of exempt supplies are not entitled to claim input tax credits to recover the GST/HST paid on related expenditures.
Generally, the GST/HST applies to the value of the consideration for taxable supplies of goods or services made in Canada. While the consideration is usually expressed in money, the consideration, or part of the consideration, may be other than money, such as property or a service. In such cases the value of the consideration, or part of the consideration, is the fair market value of the property or service.
The payment of money and the provision of an employee’s services to an employer are not supplies. However, certain actions may, in some circumstances, cause GST/HST to be payable; for example, imports of services and intangibles by a Canadian branch from a foreign branch of the same financial institution, or benefits provided to employees.
There are many special rules for public service bodies and for financial institutions.
Registration – Canadian entities
Generally, if a person makes taxable supplies in Canada and the value of its taxable supplies made inside or outside Canada (including any associated entities) exceeds CAD30,000 in the last four calendar quarters or in a single calendar quarter, the person is required to register, collect, and remit the GST/HST on its taxable supplies. If the value of taxable supplies made by the person and its associated entities is below this registration threshold, the person is considered a small supplier, but can still choose to register voluntarily for GST/HST purposes. A person who voluntarily registers is subject to the same obligations and rules as other GST/HST registered persons.
Other special registration rules apply to, among other entities, charities and taxi businesses.
Registration – Non-Canadian entities
The registration rules that apply to Canadian entities also apply to non-Canadian entities that make taxable supplies in Canada in the course of a business carried on in Canada.
Also, other registration rules may apply to some non-Canadian entities such as an entity that sells taxable admissions to an event.
Non-resident registrants without a permanent establishment in Canada will generally be required to provide and maintain security with the CRA.
Provincial indirect taxes
The provinces of British Columbia, Saskatchewan, and Manitoba each levy retail sales taxes on tangible personal property and certain intangibles and services. The rates vary from 5 percent to 8 percent. The legislation and rules vary among the provinces. The province of Alberta currently does not have a sales tax.
In addition, the province of Québec levies a 9.975 percent Québec sales tax (QST). Subject to a few exceptions, the QST applies generally the same as GST.
Canada generally follows the Organisation for Economic Co-operation and Development (OECD) report Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The CRA and Income Tax Act Section 247 provide the transfer pricing authority. CRA Information Circular 87-2R and various transfer pricing memoranda published by the CRA provide guidelines to the regime. Canadian transfer pricing legislation and administrative policy generally require that transactions between Canadian taxpayers and non-arm’s length non-residents are priced according to the “at arm’s length principle” (i.e., as though the parties dealt with each other at arm’s length). Canadian transfer pricing rules generally apply to all entities including corporations, partnerships, branches and trusts under common control in different jurisdictions that transact with each other or have a parent/subsidiary relationship. Common intercompany transactions where transfer pricing rules apply include management and other services, sales and purchases of tangible and intangible goods, and intercompany loans.
An example of an intercompany service transaction is an employee of Company A who performs services for the benefit of Company B, a non-arm’s length non-resident. This situation often gives rise to intercompany service transactions that should be priced according to the arm’s length principle (i.e., Company would not allow its employee to provide services to a third party without charging appropriate compensation for those services).
Executive employees, employees of shared service centers or technical employees often work for the benefit of a non-arm’s length non-resident. Therefore, it is important to consider the activities they perform in the context of whether or not an inter-company transaction exists (e.g., operating activities performed for the benefit of the recipient resident in another jurisdiction or stewardship activities performed for the benefit of the non-resident shareholder).
In determining whether a deduction is allowed for transfer pricing purposes, it must first be determined whether an intra-group service has in fact been provided (i.e. whether the activity provides a respective group member with economic or commercial value to enhance its commercial position). It must also be determined whether the intra-group charge for such services is in accordance with the arm’s length principle. The costs must be specific, identifiable, and reasonable.1 Furthermore, the service should not be duplicative of the service provided by the company or a third party. Each case must be determined according to its own facts and circumstances. In all cases, proper documentation must be maintained to support the transfer pricing methodology used.
Canada has data privacy laws. The Personal Information Protection Electronic Documents Act establishes 10 privacy principles and applies to all inter-provincial and international transactions. Businesses must generally obtain opt-out consent in order to collect, use, or disclose personal information. The law has received an ’adequacy‘ rating from the European Union. The Privacy Commissioner’s Office has broad powers to ensure compliance. Various provinces have implemented separate data privacy rules that are largely similar to the federal law.
No direct controls are in effect on the movement of capital or other payments either into or out of the country. The government is in the process of actively strengthening its anti-money laundering regime to align with international best practices. There are some limitations on foreign investment in specific sectors, but these have been significantly liberalized since 1985.
Every individual entering or leaving Canada is required to report any importation or exportation of currency or monetary instruments in excess of CAD10,000. The currency or monetary instruments are subject to forfeiture or assessment of a penalty if not properly reported.
Currency refers to the currency of any country. A monetary instrument refers to any financial instrument that is immediately negotiable; is a bearer instrument, such as a bearer bond; or is a security, government, or corporate note or bond.
Importation or exportation refers to carrying currency or monetary instruments on one’s person or causing another person to do so, including a courier or mail delivery.
Electronic money transfers between financial institutions are subject to separate reporting procedures typically handled by the financial institutions.