22 March 2012 Internal T.I. 2012-0436311I7 - payroll withholdings by non-resident employer

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: 1. Is a non-resident employer required to deduct withholdings at source from the salary it pays to an employee who is a resident of Canada, even where the employer does not directly or indirectly do business in Canada? 2. If the employee is required to pay US income taxes, is the non-resident employer relieved of its obligation to withhold Canadian payroll deductions from the Canadian resident employee's salary? 3. Is there an inconsistency between our position in 2010-0383561I7 and the information provided in the Canada Revenue Agency Guide for Business Enquiries Agents and the Employer's Guide to Payroll Deductions (T4001)?

Position: 1. Yes. 2. No. 3. See discussion below

Reasons: See below

Alykhan Virani
Senior Business Agent
Edmonton Tax Services Office
Suite 10							Angelina Argento
9700 Jasper Avenue						2012-043631
Edmonton AB  T5J 4C8

March 22, 2012

Dear Mr. Virani:

Re: Withholdings from Wages

This is in reply to your email of January 31, 2012 wherein you asked the following questions:

1. In 2010-0383561I7 we state that "a (non-resident) employer is required to deduct withholdings at source from the salary that it pays to an employee who is a resident of Canada ("Employee"), regardless of where the services are rendered". You ask whether a non-resident employer that does not directly or indirectly do business in Canada is required (under the Act) to deduct withholdings at source from the salary it pays to the Employee;

2. Assume the Employee is a resident of the U.S., performs work in Canada and is required to pay US income taxes. Would the non-resident employer be relieved of its obligation to withhold Canadian payroll deductions (due to the fact that it has withheld US payroll deductions); and

3. Is the position in 2010-0383561I7 inconsistent with what is indicated on the following websites:

a. The Canada Revenue Agency Reference Guide for Business Enquiries Agents: http://infozone/english/r5011204/csd/manuals/bwref_guide/module4/module4-05-e.asp#P966_54480)

b. The Employer's Guide to Payroll Deductions (T4001)) http://www.cra-arc.gc.ca/E/pub/tg/t4001/t4001-e.html#P1352_143419

c. Canada Revenue Agency Website page entitled "Employment Outside Canada") http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/spclsttns/tsd/menu-eng.html

In particular, you state that the above-mentioned sites imply that a non-resident employer has the obligation to withhold Canadian payroll deductions from remuneration paid to a resident of Canada only if the employment of the Employee is exercised in Canada.

OUR COMMENTS

Employer's Obligation to withhold Canadian payroll deductions

It is clear that a non-resident employer which has hired a Canadian resident individual to render services only in the US, has an obligation to withhold the Canadian payroll deductions pursuant to paragraph 153(1)(a) of the Act (regardless of whether or not the non-resident employer directly or indirectly carries on business in Canada). In particular, paragraph 153(1)(a) imposes a withholding obligation on every person paying at any time in a taxation year salary, wages or other remuneration. The detailed rules applicable to determine the amount of withholding are found in section 102 of the Regulations. Paragraph 102(1)(a) of the Regulations states that an employer must deduct and withhold Canadian income tax from any payment of remuneration made to an employee where the latter reports for work at an establishment of the employer, including an establishment located outside Canada.

Employer's Obligation in the event the Employee must pay US income taxes

The non-resident employer is not relieved of its obligation to withhold Canadian payroll deductions by the fact that it has withheld US payroll deductions from the wages it pays the Employee. As mentioned in 2010-0383561I7, Article XV of the Treaty does not interfere with Canada's right to tax its residents on their employment income. Where, pursuant to the Treaty, the U.S. has taxed the Employee on the employment income paid by the non-resident employer, the Employee will be entitled to a foreign tax credit in computing his/her Canadian taxes payable in Canada. The Employee may be able to obtain a "letter of authority" from the Canada Revenue Agency to authorize the non-resident employer to reduce the Canadian deductions at source to take into account the foreign tax credit.

CRA Websites

The first site referred to (The Canada Revenue Agency Reference Guide for Business Enquiries Agents): http://infozone/english/r5011204/csd/manuals/bwref_guide/module4/module4-05-e.asp#P966_54480) clearly deals with an employer's obligation with respect to Canada Pension Plan ("CPP") deductions. However, this site links the reader to the Employer's Guide - Payroll Deductions and Remittances (T4001(E) Rev 11), which provides in Chapter 1 "General Information" under the heading "What are your responsibilities?", the following note,

Notes
Employers resident outside Canada who have employees in Canada but do not have an establishment in Canada have the same responsibilities as Canadian employers, except that CPP coverage is optional.

There is no discussion of the Canadian withholding tax obligations of a non-resident employer who hires a Canadian resident employee who performs services entirely outside Canada. So, perhaps this note may be misleading in that it may imply that the non-resident employer has a Canadian withholding obligation only if the employee is providing services in Canada. Perhaps the note should be amended to state simply that a non-resident employer (who does not have an establishment in Canada), who hires a Canadian resident employee, has the same responsibilities as a Canadian resident employer (regardless of whether the services performed by the Canadian resident employee are performed in Canada or outside Canada).

The second site (The Employer's Guide to Payroll Deductions (T4001)) http://www.cra-arc.gc.ca/E/pub/tg/t4001/t4001-e.html#P1352_143419 also deals with the employer's obligation to contribute to the CPP in respect of employment exercised outside Canada and makes the following note:

Income tax - If an employee performs services for you outside Canada, you may have to deduct income tax from that employee's remuneration. It should be noted that the employee may be entitled to a tax reduction subject to a foreign tax credit in respect of taxes paid in a foreign jurisdiction. A request for a letter of authority should be made. If you are not sure if you should deduct income tax, call 1-800-959-5525.

The third site (CRA Website page entitled "Employment Outside Canada") http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/spclsttns/tsd/menu-eng.html,
Under the heading Employer Deductions: Income Tax Deductions simply repeats the above note:

Income tax deductions
If an employee performs services for you outside Canada, you may have to deduct income tax from that employee's remuneration. It should be noted that the employee may be entitled to a tax reduction subject to a foreign tax credit in respect of taxes paid in a foreign jurisdiction. A request for a letter of authority should be made. If you are not sure if you should withhold income tax, call at 1-800-959-5525.

It is our view that the comments in the second and third above-mentioned sites are not technically incorrect or misleading as they address any employer (i.e. regardless of where it is resident). Furthermore, the first sentence states that such an employer "may" have to deduct Canadian payroll withholdings, and thus leaves open the possibility for the application of subsection 104(2) of the Regulations.

However, if you wish more clarity, a sentence may be added to indicate that if the employee is a Canadian resident, then the employer's obligation to withhold Canadian payroll deductions applies regardless of where the employment services are provided (i.e. inside or outside Canada) and regardless of whether or not the employer carries on business in Canada.

We trust that these comments will be of assistance.

Yours Truly,

Olli Laurikainen
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch