23 January 1992 Income Tax Severed Letter 9130936 - Canadian Payroll Association (Round Table Questions)

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.

January 23, 1992

      Source Deductions Division              Rulings Directorate
      A. Bissonnette                          Foreign Section
      Director                                Jim Wilson
                                              957-2123
      Attention: E. Hammond

                                              7-913093

C.P.A. Cross Border Payroll Symposium - Roundtable Questions Further to the memorandum of November 25, 1991 from our Business and General Division (copy attached) and our telephone conversations with Mr. Hammond, it was agreed that we would prepare the written reply for each roundtable question requiring a reply from the Department. In this regard, we have enclosed our suggested answers to questions 2,3,5,6,11,12 and 13. In regard to Question 5, we have revised the answer up to the actual breakdown of the benefits. We suggest you incorporate the suggestions made by the Business and General Division regarding such benefits before distributing the final product. In spite of the comments in the above-noted memorandum regarding Question 6, we have revised the answer to deal with the non-resident problem. We have not reviewed Question 8 (which also requires a reply from the Department) pertaining to the Canada-U.S. Social Security Agreement as your division is better suited for this topic.

If the Department is expected to reply to questions on an annual basis, we do not object to being involved in the initial preparation of the written response. In this regard we suggest that the coordinators of the symposium provide the Department with the questions well in advance of the meeting. for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

QUESTION #2

a) If an employee is on a two year international assignment and has been out of the country for less than the 183 days in the current year (for example, their assignment started on October 1, 1991), can the Overseas Employment Tax Credit still be claimed for the 1991 taxation year?

b) How does RCT determine that the employee still qualifies, since the footnote on the T4 will state a period of less than 183 days?

DEPARTMENT'S POSITION

a) The Overseas Employment Tax Credit (O.E.T.C.) only applies to individuals who are resident in Canada. It is a question of fact whether an individual would maintain Canadian residence status while temporarily working outside Canada. Reference should be made to Interpretation Bulletin IT-221R2 which deals with the determination of an individual's residence status. Where an individual has maintained Canadian residence status, the O.E.T.C. will apply where "throughout any period of more than 6 consecutive months that commenced before the end of the year and included any part of the year" the individual was employed by a specified employer (as defined in section 122.3) and performed all or substantially all the duties of his employment in one or more countries other than Canada in connection with a contract referred to in subparagraph 122.3(1)(b)(i) of the Act or for the purpose of obtaining such a contract on behalf of the employer. Therefore, an individual on a two year assignment who has maintained Canadian residence status while abroad would be eligible for an O.E.T.C. in 1991 where his assignment commenced on October 1, 1991 provided he meets all the other conditions described in section 122.3 of the Income Tax Act.

All employees making a claim for the O.E.T.C. are required to complete form T626, have it certified by the employer and attach it to their T1 returns. In the scenario presented, form T626 should be attached to the 1991 T1 return which would attest to the fact that the individual would be out of the country for a period of six consecutive months, even though the period overlapped three taxation years. A certified form T626 would also have to be filed with the 1992 and 1993 returns if the taxpayer wished to make a claim for those years as well.

b) As mentioned above, Revenue Canada will generally proceed with the initial assessment of T1 returns based on the information provided by the employer and the employee on form T626.

QUESTION #3

a) Can an employee make application to have their tax withholdings reduced at source by virtue of the fact that they would be deemed to be eligible to receive either an Overseas Employment Tax Credit or a Foreign Tax Credit?

b) Where certain employers may have numerous employees on international assignments, could the employer apply for a blanket waiver to cover the reduction in source deduction withholdings described in (a) above?

DEPARTMENT'S POSITION

a) Yes, an employee can make application to have their tax withholdings reduced at source by virtue of the fact that they will be entitled to deduct an Overseas Employment Tax Credit or a Foreign Tax Credit.

b) Where an employer may have numerous employees on international assignments, as a matter of policy the Department is willing to allow the employer to apply for a blanket waiver to cover the reduction in source deduction withholdings, for all eligible employees, with respect to the Overseas Employment Tax Credit or the Foreign Tax Credit. We should stress, however, that approval of such a waiver would be the responsibility of the appropriate District Taxation Office or Offices, and would be considered only on the basis that the employer is able to clearly establish the entitlement of all affected employees to these credits.

QUESTION #5

In most circumstances, employees taking international assignments are provided with benefits similar to the coverage they would have received had they remained in Canada. In some cases, additional benefits are provided to accommodate certain unique situations. In the following situations, comment on whether the provision of the benefit or payment described would be considered taxable or non-taxable from a Canadian tax perspective?

- housing for expatriate employee and family

- schooling/education costs to provide English language (or equivalent) schooling for dependent children

- fees paid to a property management firm to care for the employee's residence in Canada while on assignment

- financial counselling relevant to assignment

- tax return preparation relevant to assignment - both Canadian and foreign tax returns

- expenses related to home leave (for example - return air fare for expatriate employee and family - once per year to return to Canada - or equivalent destination)

- transportation to and from work. What about situations where security risks make it mandatory that the employee travel in a company-provided chauffeured vehicle?

- payment of goods and services differential - this amount would equate to $x per month, based on certain economic indicators and compensates an employee for the differences in purchasing power between Canada and the expatriate location (ie. inflation protection).

- payment of hardship allowances that compensate the employee for extraordinary working and living conditions in the foreign county.

- payment of a relocation allowance

- reimbursement of moving expenses

DEPARTMENT'S POSITION

A determination of the employees Canadian residence status while abroad must be made (see our comments in Question #2). Where the employee was formerly a resident of Canada and became a non- resident of Canada as a result of the international assignment, remuneration paid to the employee by an employer resident in Canada for duties performed outside Canada will not be subject to tax in Canada provided the remuneration meets the exception described in clause 115(2)(e)(i)(A) or (B) of the Income Tax Act (see Interpretation Bulletin IT-161R3 ).

Where the employee maintains Canadian residence status while abroad, the rules in subdivision a (sections 5 to 8 inclusive) of the Income Tax Act apply in computing the taxpayers income or loss from an office or employment. The benefits you have listed should be treated as follows:

- Housing - Taxable (6(1)(b) ; IT-470R , par. 6);

- Schooling/Education Costs - Non-taxable if the conditions in 6(1)(b)(ix) are met, i.e. child living away from home; instruction in the employee's official language is not available in the place where the employee is required to live; the school uses that language primarily; the school is no farther from where the employee lives than the nearest community in which suitable boarding facilities exist. In addition, this would not be a taxable benefit to the employee if employer considered to be providing free or subsidized school services in a remote or unorganized area (6(1)(b); IT-470R , par. 31);

- Property Management Fees - Taxable (6(1)(b));

- Financial Counselling - Taxable (6(1)(b) IT-470R S.R. par.6);

- Tax Return Preparation - Taxable (6(1)(b) IT-470R S.R. par.6)

- Expenses Related to Home Leave - Taxable (6(1)(b));

- Transportation To/From Work - Normally taxable (6(1)(b)). However, in situations where security risks make it mandatory that the employee travel in a company- chauffeured vehicle, employees are not regarded as in receipt of a taxable benefit ( IT-470R , par. 32);

- Goods and Services Differential - Taxable (6(1)(b)), except for certain deemed residents (6(1)(b)(iii));

- Hardship Allowance - Taxable (6(1)(a)), except for certain deemed residents (6(1)(b)(iii));

- Relocation Allowance - if paid in a non-accountable manner, amounts in excess of $650 taxable (6(1)(b));

- Reimbursement* of Moving Expenses - Not taxable where employee/family move to another establishment of the employer, or where employee/family move to accept employment with employer ( IT-470R , par. 35).

(* includes accountable advance)

QUESTION #6

Are there any methods available that would allow an employee going on a foreign assignment the opportunity to defer compensation normally payable during the assignment until they return to Canada?

DEPARTMENT'S POSITION

The Salary Deferral Arrangement ("SDA") rules in the Income Tax Act do not prevent employers and employees from entering into such arrangements but rather where a SDA (as defined in section 248 of the Act) exists any and all deferred amounts under such an arrangement will be brought into income for the year in which they were deferred (except in exceptional circumstances described in subsection 6(13) of the Act). If employees on foreign assignment have maintained Canadian residential status they are generally required to bring into income all deferred remuneration in the year it is deferred.

Where an employee has become a non-resident of Canada while on foreign assignment his remuneration would only be taxable in Canada if it was in respect of services performed in Canada (ignoring the exceptional circumstances where paragraphs 115(2)(c) & (e) might apply). However, any deferred remuneration relating to services performed outside Canada while on the foreign assignment and subsequently received by the employee after he has re-established Canadian residential status generally would be taxable in Canada.

QUESTION #11

An expatriate employee is recalled to their Canadian Head Office for several short periods of time to conduct business relevant to their overseas operations. On another occasion, the same individual returns to Canada for a month's vacation. How does this impact on the claiming of the Overseas Employment Tax Credit in view of the 183 consecutive day requirement?

DEPARTMENT'S POSITION

An employee would generally not be disqualified from the Overseas Employment Tax Credit because he spent time in Canada (e.g. vacation or consultation with the employer) during the "qualifying period" (i.e. as defined in subsection 122.3(1) of the Act). Subsection 122.3(1) requires that the individual "throughout" the qualifying period performed all or substantially all the duties of his employment in one or more countries other than Canada for a specified employer in connection with a contract referred to in subparagraph 122.3(1)(b)(i) of the Act or for the purpose of obtaining such a contract on behalf of the employer. Any period of time spent in Canada will be reviewed on an individual basis to ensure that the employee is performing such duties "throughout" the qualifying period. Factors that will be taken into consideration include the regularity and length of visits to Canada, industrial practice (e.g. offshore personnel usually work 30 days on and 30 days off), the nature of the work performed and the remoteness of the work site from any established community. During the period of absence from his overseas employment, the employee may perform duties of employment in Canada provided no less than 90 per cent of the duties performed throughout the qualifying period are duties performed outside Canada. An employee who otherwise meets the requirements of subsection 122.3(1) but performs less than 90 per cent of the duties of employment outside Canada will not qualify for the Overseas Employment Tax Credit.

QUESTION #12

a) XYZ Industries of Markham, Ontario have an immediate need for a nuclear physicist to lead a short-term research project of 3 months. Due to the lack of qualified candidates within Canada, they elect to retain the services of a German physicist, who is employed with one of their subsidiaries in Hamburg, Germany. From a payroll withholding and reporting perspective, what considerations must be given?

b) If this assignment were for a longer period, for example 2 years, are there any different requirements to note?

DEPARTMENT'S POSITION

The Department has not been provided sufficient information to respond to this question adequately. Information that would be required includes the following:

1) Whether an employee/employer relationship exists between the Canadian company and the German physicist. 2) Whether the German subsidiary is carrying on business in Canada and if so is it through a permanent establishment. 3) The residence status of the German physicist for purposes of the Income Tax Act and the Canada-Germany Income Tax Convention (the "Convention").

With respect to #1 above, it is always a question of fact whether an employer/employee relationship exists in any given situation. If an individual comes to Canada and exercises his duties for a Canadian company and the costs, whether directly or indirectly, are borne by the Canadian company, the presumption is that the Canadian company is an employer and the individual is taxed in Canada unless there are other facts which dictate the contrary. The individual may be paid by the German company, but when he is performing his duties under the direction of the Canadian operation, the Canadian company will be considered the employer of the individual for purposes of the Income Tax Act and the Convention.

With respect to #2 and #3 above, such determinations are also a question of fact and would have a significant affect on the application of the Income Tax Act and Convention. Since the concern here is mainly from a payroll withholding and reporting perspective, we have provided the following general comments:

a) Where the physicist is considered an employee of the Canadian company, then any person paying salary or wages or other remuneration in respect of that employment is required to withhold income tax, C.P.P. and U.I. and to report the salary and the withholdings on a T4 Supplementary. In no circumstances would the employee be exempt from Canadian tax pursuant to Article XV of the Convention. However, the requirement to withhold C.P.P. could be waived if it is determined under the Canada-Germany Social Security Agreement that the German Social Security Plan would be applicable to that person's employment.

If the physicist remains an employee of the German subsidiary, the Canadian company must withhold 15% under Regulation 105 with respect to any payments made to the subsidiary for the services of its employee and must report the payments and withholdings on a T4A-NR Supplementary. Where the German subsidiary can demonstrate that it will not be subject to tax in Canada pursuant to the provisions of the Convention (ie. the German subsidiary is not carrying on business in Canada through a permanent establishment) or by an estimate of it's income and expenses, the withholding otherwise required by Regulation 105 may be waived. In this regard reference should be made to Information Circular 75-6R and particularly paragraphs 10 to 16 thereof which pertains to applications for a waiver or a reduction of Regulation 105 withholding tax.

In the above situation the Income Tax Act and the Unemployment Insurance Act would require the non-resident employer to withhold income tax and U.I. premiums from the employee's salary for the services performed in Canada, and to report the salary and withholdings on a T4 supplementary. Contributions for Canada Pension Plan are not required where the person is employed by an employer who is not resident in Canada and does not have an establishment in Canada. However, where the employee is a resident of Canada he may be able to elect to make Canada Pension Plan contributions on such remuneration in a manner similar to that of self-employed individuals. The requirement to withhold Canadian income tax could be waived if the employee is exempt from Canadian tax pursuant to Article XV of the Convention. An application for a waiver or a request for information regarding withholding, remitting, and reporting requirements should be forwarded to the Chief of Source Deductions of the District Office that serves the area where the services are to be rendered.

b) If the assignment were for a longer period of time, for example two years, the general comments above still apply. However, due to the length of time in Canada, it is likely the Convention will not affect Canada's right to tax business profits earned in Canada by the German subsidiary or remuneration paid to the employee by the German subsidiary (i.e. an application for a waiver as mentioned above will likely not be possible). In this regard, however, we do not have sufficient information to provide a definitive answer with respect to the application of the Convention, particularly in its application to the employee in light of his potential dual residence.

QUESTION #13

In reference to question number 12, if XYZ Industries did not follow the reporting and withholding requirements as you have stated, what penalties could they be subject to?

DEPARTMENT'S POSITION

If XYZ Industries or the German subsidiary, depending on which would be considered the employer, did not follow the proper withholding, remitting and reporting requirements, as regards their obligations as an employer, the employer would be subject to all the provisions of the Act pertaining to such failure to withhold, remit and report including the following:

i) both shares of any unemployment insurance premiums which should have been deducted (s.s. 53(1) U.I. Act);

ii) a minimum 10% failure to remit penalty on the U.I. amount (s.s. 53(7) U.I. Act);

iii) the tax that was required to have been deducted from the salary and wages earned in Canada had the employee been a non-resident of Canada or who was resident in Canada only by reason of paragraph 250(1)(a) of the Act (s.s. 227(8.4) I.T. Act);

iv) a penalty amounting to 10% (20% for repeat offenders) of the amount that should have been deducted or withheld (s.s. 227(8) I.T. Act);

v) a minimum penalty of $100 (maximum $2500) for the failure to file an information return (s.s. 162(7) I.T. Act);

vi) interest on the U.I. premiums from the date they should have been remitted until such time as they are paid (s.s. 53(6) U.I. Act);

vii) interest on any tax that was required to have been deducted computed for the period described in s.s. 227(8.3) of the I.T. Act;

viii) interest on the penalties from the date of mailing of the original notice of assessment until such time as they are paid (s.s. 161(11) I.T. Act) except interest on the penalty described in ss. 162(7) will be computed for the period described in paragraph 161(11)(a); and

ix) any employer who has committed an offence described in paragraphs 239(1)(a),(b),(c) or (d) of the Act or conspired with any person to commit such an offence is guilty of an offence and, in addition to any penalty otherwise provided in the Act, is liable on summary conviction to a fine of not less than 50% and not more than 200%, of the amount of the tax that was sought to be evaded, or both the fine and imprisonment for a term not exceeding 2 years.

As regards their obligations as a payer within the meaning of Regulation 105, XYZ Industries would be subject to all the provisions of the Act pertaining to such failure to withhold, remit and report including the following:

i) the tax that was required to have been deducted from the payment for services provided in Canada by the German subsidiary (s.s. 227(8.4) I.T. Act);

ii) a 10% (20% for repeat offenders) failure to deduct penalty as in (iv) above;

iii) a minimum penalty of $100 (maximum $2500) for the failure to file an information return as in (v) above;

iv) interest on any tax which should have been deducted as in (vii) above;

v) interest on the penalties as in (viii) above; and

vi) a payer may be liable on summary conviction to a fine or both the fine and imprisonment as described in (ix) above.