19 March 2025 External T.I. 2024-1043781E5 - Withholding on payment to non-resident employees

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: Does a resident employer have to withhold tax on salary paid to a non-resident employee where the duties of employment are performed outside Canada and the remuneration is taxed in the other country?

Position: No.

Reasons: Subsection 104(2) of the Regulations provides that withholding is not required where duties of employment are performed outside Canada by a non-resident employee and the payment is subject to tax in the country of residence.

XXXXXXXXXX									2024-104378
										Pierre Girard

March 19, 2025

Dear XXXXXXXXXX:

Re: Tax Withholdings on Payments to Non-Resident Employees

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the “Act” ).

We are writing in reply to your enquiry of November 12, 2024 in which you requested our views on the application of subsection 104(2) of the Income Tax Regulations (“Regulations”) to the following situation:

• An individual officially became non-resident of Canada in 2023;
• Before leaving Canada, the individual was employed by a corporation incorporated in Canada (“the non-resident employee”);
• After leaving Canada, the non-resident employee continued providing services remotely for that employer;
• From the moment the non-resident employee started performing his employment duties outside Canada as a non-resident, he has received a salary from the employer, which has been subject to tax in the other country.

You shared your view that in the above situation, subsection 104(2) of the Regulations applies to exempt the Canadian employer from having to withhold tax on the payments of remuneration made to the non-resident employee.

Our comments

As a general rule, a person who pays remuneration to a non-resident employee is required to withhold an amount of tax at the prescribed rate. More precisely, the requirement to withhold tax on remuneration would apply as a result of paragraph 153(1)(a) of the Act as well as Part I of the Regulations.

However, subsection 104(2) of the Regulations provides that withholding is not required from a payment of remuneration in respect of an employee who was neither employed nor resident in Canada at the time of the payment, unless one of the exceptions listed in paragraphs 104(2)(a) or (b) of the Regulations applies.

According to the facts of your request, the employee was no longer resident in Canada at the time of the payments. The non-resident employee is also not considered as “employed in Canada” given that the employment duties are performed outside the country. As such, unless paragraph 104(2)(a) or (b) of the Regulations applies, the employer is not required to withhold an amount of tax from the remuneration paid to the non-resident employee.

Paragraph 104(2)(a) of the Regulations applies when the non-resident ceased to be resident of Canada in the year or in any previous year and remuneration paid to the non-resident is described in subparagraph 115(2)(e)(i) of the Act.

Nevertheless, in order for an amount to fall within the ambit of subparagraph 115(2)(e)(i) of the Act, it must be remuneration in respect of an office or employment paid by a person resident in Canada and received by the non-resident in the year, except to the extent that the remuneration is attributable to the duties of an office or employment performed by the non-resident person anywhere outside Canada and:

(A) is subject to an income or profits tax imposed by the government of a country other than Canada, or

(B) is paid in connection with the selling of property, the negotiating of contracts or the rendering of services for the non-resident person’s employer, or a foreign affiliate of the employer, or any other person with whom the employer does not deal at arm’s length, in the ordinary course of a business carried on by the employer, that foreign affiliate or that person.

In light of the facts submitted, such that the remuneration is in respect of duties performed outside Canada and is also subject to tax in the country in which the employee now resides, the payments received by the non-resident employee would not be payments described in subparagraph 115(2)(e)(i) of the Act. Therefore, paragraph 104(2)(a) of the Regulations would not apply to require the employer to withhold on the payments of remuneration to the non-resident employee.

On the other hand, paragraph 104(2)(b) of the Regulations applies if remuneration is reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person. As previously mentioned, the facts of your request clearly suggest the employment duties are performed outside Canada, such that paragraph 104(2)(b) of the Regulations would also not be applicable to your situation.

Given that none of the exceptions in paragraphs 104(2)(a) and (b) of the Regulations apply, we agree with your view that the general rule in subsection 104(2) of the Regulations applies, with the result that the employer does not have to withhold any amount of tax from the payments of remuneration made to the non-resident employee.

Notwithstanding the fact that the employer does not have withholding obligations in respect of these payments, the employer is still required to make an information return in prescribed form pursuant to subsection 200(1) of the Regulations.

We trust these comments will be of assistance.

Yours truly,

Gillian Godson
Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch