1 November 2005 External T.I. 2005-0121801E5 - withholding of income tax on salary paid

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an employee who has a home in Canada but works for a U.S. employer and spends over 50% of his time working in the U.S. is subject to withholding of Canadian or U.S. income tax on his pay cheques?

Position: Since the employee appears to be a resident of Canada, the employer is required to withhold Canadian income tax. General discussion of "tie-breaker" rules under the Canada-U.S. Tax Convention provided.

Reasons: Par. 153(1)(a), Reg. 102(1) and Reg. 104(2) require withholding of Canadian income tax by a resident and non-resident employer when the employee is a resident of Canada.

2005-012180
XXXXXXXXXX Catherine Bowen
(613) 957-8284
November 1, 2005

Dear XXXXXXXXXX:

Re: Withholding of income tax on salary paid to an employee

This is in response to your letter dated February 21, 2005 wherein you requested our comments on whether an employee who has a home in Canada but works for a company in the United States of America (the "U.S.") is subject to the withholding of Canadian or U.S. income tax by his employer on his pay cheques. We apologize for the delay in responding to your letter.

Your letter describes a situation where an individual lives in Canada and has an office set up in his home. Although the individual's employer is located in the U.S., a Canadian payroll company that acts as an agent for the U.S. employer processes his pay cheques. The individual is a regional sales manager for a territory that covers parts of Canada and the U.S. and spends over 50% of his time travelling and working in the U.S. Even though the individual has received his Permanent Resident Card issued by the Immigration & Naturalization Service of the U.S., he has not relocated his home to the U.S.

Our Comments

We understand that you have been in contact with Ms Christine Pelchat of the Canada Pension Plan/Employment Insurance Eligibility Division, Revenue Collections Branch of the Canada Revenue Agency (the "CRA") and that she will be responding to your queries concerning an employer's withholding requirements for Canada Pension Plan contributions and Employment Insurance premiums on salary, wages or other remuneration paid to an employee. We are responding to your queries concerning the withholding requirements for Canadian income tax on salary, wages or other remuneration paid by an employer to an employee. Unfortunately, we are unable to provide you with comments regarding an employee's income tax status or residence status in the U.S. as this is outside the mandate of the CRA. Concerning this matter, we suggest that you contact either the Internal Revenue Service or a tax practitioner who is familiar with cross-border employment issues.

The circumstances outlined in your letter relate to a specific fact situation. We note that written confirmation of the income tax implications arising out of a particular fact situation are given by this Directorate only where the circumstances or events are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 dated May 17, 2002 issued by the CRA. There is a fee charged for this service. However, we are able to provide the following general comments that may be of assistance.

Pursuant to paragraph 153(1)(a) of the Canadian Income Tax Act and subsections 102(1) and 104(2) of the Canadian Income Tax Regulations, both resident and non-resident employers are required to withhold Canadian income tax at source from the salary, wages or other remuneration that is paid to employees who are residents of Canada, regardless of whether the services of the employees are rendered in or outside Canada. Residents of Canada are taxable in Canada on their worldwide income.

A detailed discussion of what factors make an individual a resident of Canada for income tax purposes are contained in Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status ("IT-221R3"), which was forwarded to you by e-mail on July 20. Generally, an individual who lives in a home or dwelling place in Canada will be a resident of Canada. Based on the limited facts provided in your letter, the individual you describe would be a resident of Canada because his home in Canada represents a significant residential tie to Canada (as discussed in paragraphs 4 and 5 of IT-221R3).

It is, however, possible for an individual to be a dual-resident; that is, a resident of both Canada and the U.S. under the applicable domestic laws of each country. Where this is the case, then the individual's deemed residence status for purposes of the Canada-United States Income Tax Convention (the "Convention") will be determined by the "tie-breaker rules" found in Article IV of the Convention. For a general discussion of these rules, please refer to paragraphs 25 and 26 of IT-221R3. As noted in paragraph 26 thereof, if a person has only one permanent home available to him or her, then that person will be resident for purposes of the Treaty in the country in which the permanent home is located. Based on the limited facts provided in your letter, the individual you describe has only one permanent home available to him and it is situated in Canada. Therefore, even if he were a dual resident under the applicable domestic laws of each country, he would be a resident of Canada for Canadian income tax purposes as a result of applying the "tie-breaker rules". Consequently, as noted above, Canadian income tax is required to be withheld at source by his employer from all salary, wages or other remuneration paid to him. Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5. We trust our comments are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch