Does your foreign company deploy staff to Canada? If so, this article is important for your business.
In the context of constantly changing international trade, many companies are sending their employees to work in Canada on short or long-term assignments.
However, such assignments can have tax implications for both the employer and the employee. Fortunately, solutions such as exemption and certification are available to help manage this complex situation in terms of international taxation.
In this article, we’ll look at the intricacies of the exemption for non-resident employees in Canada, highlighting its scope and the many benefits it offers.
We will then explore non-resident employer certification and its role in unlocking tax benefits for non-residents working in Canada.
Before sending employees to Canada, we will provide you with valuable information to clarify this process and help you make informed decisions.
What is an exemption for non-resident employees?
In Canada, a waiver for non-resident employees refers to an exemption or reduction in the tax withheld at source on their income. This income must be earned by expatriate employees who are not considered to be resident in Canada and liable for tax. Non-resident employees are generally individuals who carry on a professional activity in Canada. Non-resident employees are individuals who stay in Canada for less than 183 days during the taxation year and who have no residential ties in Canada, but reside, for example, in a member state or country of the EU (European Union) or in another country of the world.
Canadian tax laws stipulate that employers must withhold a portion of their employees’ earnings to pay federal and provincial/territorial taxes. However, if there is an international tax treaty or bilateral agreement between Canada and the non-resident employee’s home country, he or she may benefit from an exemption from certain withholding taxes or a tax reduction.
The purpose of these tax treaties is to avoid double taxation on the income of an individual who is resident for tax purposes in one country while earning income in another country. The terms and conditions of the exemptions may vary depending on the country and tax home of residence of the employee, the type of income and other specific factors.
What conditions must be met to qualify for the exemption for non-residents?
If you are a non-resident employee working in Canada, it is essential to understand the criteria for obtaining a waiver. Below are the main conditions to be met and examined before submitting an application:
- Duration of employment : The duration of your employment in Canada is one of the main conditions to be met in order to benefit from an exemption.
- Nature of your duties : The nature of your work in Canada also plays an important role in determining your eligibility. Your work in Canada must not include selling goods or services to Canadian customers, establishing a fixed place of business or carrying out other activities that would establish a taxable presence in Canada.
- Eligibility based on a tax treaty : The existence of a tax treaty between Canada and your home country may affect your eligibility for the exemption. Some tax treaties contain specific provisions regarding taxation.
Concrete examples: Tax withholding for non-resident employees in Canada
Here are two examples of case studies illustrating a situation where non-resident employees sent to Canada may have an obligation to withhold income tax.
Engineering services for installation projects
Imagine a non-resident consulting firm with its tax residence based in the United States or Europe that sends a team of consultants to Canada for a construction project with a Canadian client. In this case, the non-resident company must take into account the withholding tax obligations for its employees working in Canada. The duration of the project and the physical presence of the employees in Canada may give rise to tax obligations, requiring the non-resident company to deduct tax from the income of its employees.
Non-resident executives managing activities in Canada
Suppose a multinational corporation with its head office and tax domicile in Asia wishes to establish a subsidiary in Canada to expand its activities. The company appoints non-resident executives to oversee the development of the Canadian subsidiary. These executives may be required to spend a significant amount of time in Canada to ensure the smooth running and growth of the business. As they actively manage the subsidiary and make strategic decisions in Canada, their remuneration may be subject to the withholding tax duties imposed on non-resident companies.
What are the advantages of the derogation for non-residents?
It allows employees not domiciled in Canada for tax purposes to reduce or eliminate Canadian withholding tax, resulting in significant savings for both employer and employee.
- Cash flow management: It can improve cash flow by allowing the employee to receive the full employment income upfront, rather than waiting for a tax refund.
- Simplified compliance: It simplifies tax compliance by relieving the employer of withholding and remitting tax on behalf of the non-resident employee.
How do I apply for tax exemption for non-resident employees?
To benefit from the tax exemption provided by the tax treaty between Canada and their country of residence, non-resident employees generally have to complete and submit a specific form to the CRA (Canada Revenue Agency). Failure to comply with tax rules may result in fines and interest, as well as negative consequences for the company’s reputation.
What can ASD Group do for you?
Note: This article provides general information on tax obligations for non-resident companies sending employees to Canada and the tax exemption for non-resident employees. The content of this page is intended for information purposes only and does not constitute legal, financial or tax advice. However, tax laws can be complex and vary from case to case. You are therefore advised to consult us for advice specific to your situation.
