CRA provides Covid-related relief for the 2020 year for cross-border employees (and confirms that individuals trapped in Canada generally will not generate a Canadian PE)

The COVID-related relief set out by CRA in International income tax issues: CRA and COVID-19 mostly was stated to expire on October 1, 2020. CRA has now added a supplement to that webpage, which provides inter alia that:

  • The relief for the initial period (until September 30, 2020) regarding physical presence of individuals in Canada due to COVID travel restriction being ignored under the common-law factual test of residency and for purposes of the s. 250(1)(a) sojourning rule is extended until the earlier of the date of the lifting of the travel restrictions and December 31, 2021 (this extension does not apply to corporate residency.)
  • Although there is no extension of the relief regarding whether a non-resident employer has a fixed place of business in Canada, CRA considers that for there to be such a permanent establishment, the site must have “a semblance of permanence” and it must be at the “disposal” of the employer – so that an individual’s working remotely (in Canada) from home due to the travel restrictions “will generally not be sufficient to meet the thresholds of a permanent establishment.”
  • Similarly, regarding an “agency” PE, the individual would not satisfy the requirement of “habitually” exercising a right to conclude contracts on behalf of the non-resident enterprise where the individual “is doing so from Canada solely because of the travel restrictions.”
  • Regarding the services PE in Art. IV(9) of the Canada-U.S. Treaty, most such employees would not meet either of the thresholds in Art. IV(9) “if they are not working on projects for Canadian customers.”
  • Relief during the initial relief period respecting the 183-day test in Art. XV, 2(b) of the Canada-US Treaty is extended to December 31, 2020 so that physical presence in Canada due to COVID travel reasons will not count towards the 183 days (whereas such days after December 21, 2021 must be included under the 183-day test, with associated withholding and remittance obligations of the employer).
  • As an administrative matter, where such relief conditions are met, a non-resident employer will not be required to submit a T4 slip for the 2020 taxation year.
  • Where as a result of the travel restrictions, Canadian-resident individuals have been forced to perform their duties for a U.S. employer from their Canadian home and their employer received a CRA letter of authority (to reduce the Canadian source deductions at source to reflect the available foreign tax credit), as an administrative concession, CRA will treat the employment income from the U.S. employer for 2020 that was subject to U.S. withholding as having a U.S. source – so that those individuals can file their tax returns as in prior years and claim a foreign tax credit for the U.S. taxes.
  • Alternatively, such individuals may choose to file their 2020 Canadian income tax return in accordance with the income sourcing rules in the Treaty, i.e., reporting their employment income as sourced from Canada since they performed their duties there.

Regarding this alternative:

  • Where contributions are made in 2020 under the U.S. Federal Insurance Contributions Act (FICA), administratively the entire amount of the individual’s employment income on which the contributions were based may be included in the individual’s 2020 foreign non-business income for foreign tax credit purposes.
  • If the individual has made contributions to a U.S. retirement plan in 2020, the amount deductible on form RC268 may be determined as if the individual had continued to exercise employment duties in the U.S. throughout all of 2020.
  • If the individual paid state income tax in 2020, where the state refused to relinquish its right to tax the individual, administratively the individual may claim a foreign tax credit respecting those taxes despite the income being earned in Canada.
  • Where such individuals temporarily find it difficult to pay the full amount owing, until after the payment due date when they receive a refund of their withholdings from the U.S., CRA will cancel all or part of the interest or late-payment penalties that arise as a result until a reasonable time after the receipt of the U.S. refund.

Neal Armstrong. Summaries of CRA webpage: International income tax issues: CRA and COVID-19, including VII. Supplemental guidance (to 31 March 2021) under s. 2(1), Treaties Art. 5 and Art. 15.