Tax Articles
New Waiver Procedures for Non-Resident Employees
Author: Audra Haber
Date: August 2010
In accordance with Canadian legislation, employers must withhold income tax at source in respect of Canadian source compensation that is paid to non-resident employees for services that are rendered in Canada. This requirement applies to any employer who has employees in Canada, including non-resident employers. The remuneration (including salaries, wages, bonuses, and commissions) paid to non-resident employees who provide services in Canada is subject to the same withholding, remitting, and reporting obligations that apply to Canadian-resident employees: deductions must be made at source based on graduated rates and remitted in accordance with regulations. However, if an employee is a resident of a treaty country, they may be exempt from Canadian tax by application of a tax treaty. In such situations, it is possible to seek a waiver of the employer withholding obligation from the Canada Revenue Agency (CRA). The non-resident employee is still required to file a tax return to report their Canadian source employment income. However, with a waiver, the employee will not be forced to wait to have their Canadian withholding tax refunded to them and the employer can avoid the penalties that could apply when taxes are not withheld at source.
Traditionally, a formal waiver was required to be obtained from the CRA in order for an employer to be relieved of their withholding obligation (if the services were rendered in Québec, a waiver was required to be obtained from Revenu Québec) at least 30 days in advance of the employee starting to render services in Canada. For many businesses that require employees to travel to Canada on short notice, compliance with a waiver request in advance of the work commencing was often not feasible.
New Procedures
Recently, the CRA announced new procedures for obtaining waivers for non-resident employees who will be exempt from tax in Canada under a tax treaty and who will earn a minimal amount of income in Canada in a year (less than $10,000 CAN for a resident of the United States, and less than $5,000 CAN for a resident of a non-treaty country). Specifically, the CRA will now permit a waiver application to be made jointly by the employer and the non-resident employee in certain circumstances. According to the CRA, Form R102-J, Regulation 102 Waiver Application – Joint Employer/Employee (R102-J) is to be used in circumstances where an employee will be exempt from tax in Canada under a tax treaty and when it is not practical to apply for a waiver or the required Individual Tax Number (ITN) or Social Insurance Number (SIN) before the start of services due to the nature of the services being performed. According to the CRA, they will issue a waiver with a date that is effective before the date of the application in respect of the following types of services:
An ITN is normally assigned to a non-resident individual if they have applied for a waiver or a reduction of withholding or if they have previously filed a Canadian tax return. This waiver form is not a replacement for proper immigration procedures, such as procuring the appropriate work permits.
Where the employer is facilitating the preparation of applications for ITNs and tax waivers for numerous employees, the procedure will allow more time for giving information to the CRA.
It is worth noting that in order to be permitted to use Form R102-J, the non-resident employees must be either resident in the United States and expect their earnings related to services to be performed in Canada to be less than $10,000 CAN per year or resident in another treaty country, and expect their earnings related to services to be performed in Canada to be less than $5,000 CAN per year, and be exempt from tax in Canada.
For a detailed list of the type of information that is to be provided on Form R102-J please see http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rndr/wthhldng-eng.html.
After the CRA has approved a joint application, the CRA will issue a letter to both the employee and the employer authorizing the employer to not withhold tax on payments that are made to the employee. The authorization will be effective on the later of the two following dates:
Compliance
Where an employer fails to provide the ITNs for 90% of all employees for whom Form R102-J waivers were granted, the CRA may or may not require ITNs for all future waiver application requests. They will base their decision to require ITNs for future requests on the employer’s reporting history and, in particular, they will consider the employer’s effort to obtain an ITN or SIN, their success in facilitating the employee’s application and the receipt and provision of the ITN or SIN to the CRA.
The CRA recognizes that circumstances often change and an employee’s work in Canada may be prolonged and/or that the employee may earn more than originally expected. In these circumstances, the CRA will assume that the first waiver application was granted based on the assumption that the information originally provided was at the time complete and accurate. However, where there is a misrepresentation of information, the CRA will require remittances for the full period that the employee was present in Canada.
What Does This All Mean?
The changes made by the CRA are an effort to ease the burden of certain employers and non-resident employees that are required to travel to Canada on short notice. The 60 day grace period to make the application for a waiver after services have started should allow more employers to be able to obtain a waiver. However, the threshold amounts of income earned in Canada are very low – $10,000 for United States residents and $5,000 for residents of other treaty countries. Where the employee will be treaty exempt, but the amount of exempt remuneration is higher, a separate waiver must be made by way of a letter to the CRA explaining the facts and circumstances to support the treaty exemption. If you have any questions about how these new procedures will impact you, please consult with your BDO advisor.
