Foreign employers and temporary employees working in Canada will soon get relief from the administratively burdensome payroll withholding obligation. Canadian tax law imposes a withholding obligation on any non-resident employer paying compensation to a non-resident employee for services rendered in Canada. Although a tax treaty may provide an exemption from tax, it does not exempt the employer from its withholding obligation.
Currently, under Section 102 of the Income Tax Regulations ("Reg. 102"), an employer is only relieved of withholding obligations when it completes the tedious process of obtaining a formal waiver from the Canada Revenue Agency ("CRA") or the Minister of Revenue of Quebec, if it is subject to Quebec withholdings. An employer must apply for a formal waiver 30 days prior to payment. Waivers are granted on an individual basis and for a specific time period. Without a formal waiver, an employer must withhold taxes, and an employee must file a Canadian return to claim a treaty-based refund.
Under the 2015 federal budget proposal, "qualifying non-resident employers" are exempt from the withholding requirements for any payments made after 2015 to "qualifying non-resident employees." An employer is a "qualifying non-resident employer" if it resides in a country that currently has a tax treaty with Canada, does not conduct business in Canada through a permanent establishment, and at the time of the payment, is certified by the CRA. A qualifying non-resident employer is still responsible for reporting requirements under the Income Tax Act concerning amounts paid to employees. An employee is a "qualifying non-resident employee" if the employee is exempt from Canadian income tax because of a tax treaty and is not present in Canada for 90 or more days in any 12-month period that covers the time of the payment.
The proposed 2015 federal budget proposal is a welcome change to the current administratively burdensome withholding requirement for cross-border business travel. The proposed budget changes are effective January 1, 2016. Employers should review their business travel needs in Canada and ensure that they comply with the new regulatory framework for Reg. 102.
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