12 December 2023 External T.I. 2023-0967811E5 - Letter of Authority to reduce payroll withholding

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 or withhold from a payment of salary or wages to Canadian resident employees who perform employment services solely outside Canada, in a situation where payroll deductions are required by the country of source? 2. Where a non-resident employer is required to withhold from the payment of salary or wages to Canadian resident employees and the employees would otherwise be entitled to claim a foreign tax credit, is the employer permitted to reduce the amount withheld from the payment of salary or wages to the employees to take into account a foreign tax credit, by way of a Letter of Authority? 3. In the hypothetical circumstances noted above, will a Letter of Authority be provided to allow for the reduction of the amount withheld from the payment of salary or wages? 4. Would the fact that a Canadian resident employee performs services partially in Canada and partially outside Canada impact the response to questions 1 through 3?

Position: 1. Yes. 2. Yes. 3. It depends. 4. Based on the hypothetical facts, the response to questions 1 through 3 would not be different for a Canadian resident employee who performs services exclusively outside Canada than for a Canadian resident employee who performs services partially in Canada and partially outside Canada.

Reasons: 1. Under paragraph 153(1)(a), a non-resident employer that employs a Canadian resident employee who performs services outside Canada has an obligation to deduct from the salary or wages paid to that employee an amount determined in accordance with subsection 102(1) of the Regulations. The employer is not relieved of its withholding obligation under subsection 153(1) by the fact that it has also withheld payroll deductions as required where the services were provided. 2. In the hypothetical situation provided, a Canadian resident employee may request a Letter of Authority to authorize the non-resident employer to reduce the amount deducted from the remuneration paid to the employee to take into account the employee’s foreign tax credit for the year. 3. In the hypothetical circumstances provided, the issuance of a Letter of Authority depends on the content of Form T1213 and supporting documentation, such as completed Form T2209 and details on the employee’s foreign tax credit entitlement. 4. The non-resident employer is not relieved of its withholding obligation under subsection 153(1) of the Act despite the fact that it has withheld payroll deductions as required by the country of source and the Canadian resident employee performs services partially in Canada and partially outside Canada.

XXXXXXXXXX									2023-096781
										Mei Ng

December 12, 2023

Dear XXXXXXXXXX:

Re: Reduction of Withholding Obligations of Non-Resident Employer with Canadian 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.) (the “Act”) or the Income Tax Regulations (the “Regulations”), as amended to the date hereof.

We are writing in reply to your email inquiry of February 22, 2023 with respect to the withholding obligations of a non-resident employer in certain hypothetical situations. We apologize for the delay in our reply.

In particular, you have requested our views on the following:

1. Is a non-resident employer required to deduct or withhold from a payment of salary or wages to Canadian resident employees who perform employment services solely outside Canada, in a situation where payroll deductions are required by the country of source?

2. Where a non-resident employer is required to withhold from the payment of salary or wages to Canadian resident employees and the employees would otherwise be entitled to claim a foreign tax credit, is the non-resident employer permitted to reduce the amount withheld from the payment of salary or wages to the employees to take into account a foreign tax credit, by way of a Letter of Authority?

3. In the hypothetical circumstances noted above, will a Letter of Authority be provided to allow for the reduction of the amount withheld from the payment of salary or wages?

4. Would the fact that a Canadian resident employee performs services partially in Canada and partially outside Canada impact the response to questions 1 through 3?

While not specifically stated in the hypothetical situations provided, we have assumed that the non-resident employers in the questions are residents of the United States (“U.S.”) that employ Canadian resident employees who perform their services in the U.S.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

The following are our comments with respect to your questions concerning the withholding obligations of a non-resident employer.

Question 1

Paragraph 153(1)(a) of the Act requires every person paying salary, wages or other remuneration to withhold prescribed amounts therefrom, subject to exceptions. This withholding obligation is not dependent on whether the employer is resident in Canada or where the employment services are rendered.

Section 101 of the Regulations requires every person who makes a payment described in subsection 153(1) of the Act to withhold from the payment an amount, if any, as is determined in accordance with Part I of the Regulations. The amount to be withheld from payments of salary or wages are prescribed in subsection 102(1) of the Regulations. Paragraph 102(1)(a) of the Regulations provides that an employer must deduct an amount from any payment of remuneration made to an employee where the employee reports for work at an establishment of the employer, including an establishment located outside Canada.

In the hypothetical situation provided, since the non-resident employer’s payments made to the Canadian resident employees are payments described in subsection 153(1) of the Act, the employer must withhold an amount prescribed in subsection 102(1) of the Regulations, regardless of whether the Canadian resident employees perform their services in or outside Canada.

Subsection 104(2) of the Regulations provides that no amount shall be deducted from a payment of remuneration to a non-resident who is not employed in Canada at the time of payment, subject to the exceptions set out in that subsection. In the situation provided, the employees are Canadian residents at the time of payment. Therefore, the exceptions to the withholding requirement in subsection 104(2) of the Regulations would not apply.

For the period in which the individual is a resident of Canada, income from all sources (i.e. world-wide income) will be included in the income of the individual. Employment income would be included in the income of an employee resident in Canada under subsection 5(1) of the Act. A non-resident employer is not relieved of its withholding obligation under subsection 153(1) by the fact that it has also withheld payroll deductions in the country of source as required where the services were provided. For example, Article XV of the Canada-United States Tax Convention (the “Treaty”) does not interfere with Canada’s right to tax its residents on their employment income.

Question 2

As stated previously, paragraph 153(1)(a) of the Act requires a non-resident employer to withhold an amount prescribed in subsection 102(1) of the Regulations from the salary or wages paid to Canadian resident employees.

Where an employee who is resident in Canada exercises employment in the U.S., Article XV(1) of the Treaty provides that in some cases the U.S. may also tax the employment income paid to the employee. However, the employee would be entitled to claim a foreign tax credit for any taxes paid to the U.S. on their employment income when computing their Canadian income taxes payable under section 126 of the Act and in accordance with Article XXIV(2)(a)(i) of the Treaty.

A Canadian resident employee may request a Letter of Authority to authorize the non-resident employer to reduce the amount deducted from the remuneration paid to the employee to take into account the employee’s foreign tax credit for the year. The request is made by sending a completed Form T1213, Request to Reduce Tax Deductions at Source, or a written request to the appropriate Tax Services Office. The T4001, Employers’ Guide – Payroll Deductions and Remittances provides information for employers, which is available on our website at T4001 Employers’ Guide – Payroll Deductions and Remittances. It is recommended that the employee include documents to support their position to reduce tax deductions at source, including a completed Form T2209, Federal Foreign Tax Credits or a letter to provide details on the employee’s entitlement to the foreign tax credits and related calculations.

The Letter of Authority is issued for a specific tax year and must be obtained on an annual basis.

Question 3

In general, a request for the reduction of the amount withheld from a payment of salary or wages to take into account an employee’s foreign tax credit for the year will be considered. However, the issuance of a Letter of Authority in the situation provided depends on the content of Form T1213 and any supporting documentation, such as completed Form T2209 and details on the employee’s foreign tax credit entitlement.

Question 4

As noted above, every person who is resident in Canada is subject to an income tax on their worldwide income under subsection 2(1) regardless of where the employment services are performed. The non-resident employer is not relieved of its withholding obligation under subsection 153(1) of the Act despite the fact that it has withheld payroll deductions as required by the country of source and the Canadian resident employee performs services partially in Canada and partially outside Canada. In the hypothetical situation at hand, to the extent that the Canadian resident employee works in the U.S. and has paid tax on their employment income to the U.S., the employee is entitled to a foreign tax credit under subsection 126(1) of the Act.

According to paragraph 1.57 of the Income Tax Folio S5-F2-C1, Foreign Tax Credit, if the employment duties of an individual require the individual to spend a significant part of the time in a country other than Canada, an apportionment of the individual’s salary or wages based on the number of working days spent in Canada and in that other country is usually considered appropriate in determining the amount of foreign-source employment income for the purpose of the foreign tax credit calculation.

Similar to a Canadian resident employee who performs services solely outside Canada for a non-resident employer, a Canadian resident employee who performs services partially in Canada and partially outside Canada may be able to obtain a Letter of Authority to authorize the non-resident employer to reduce the amount deducted from the salary or wages paid to the employee to take into account the foreign tax credit of the employee for the year. The employee must send a completed Form T1213 and any supporting documentation, such as completed Form T2209 and details on the foreign tax credit entitlement.

For more information on the foreign tax credit please refer to Income Tax Folio S5-F2-C1, Foreign Tax Credit, which can be viewed on our website at Income Tax Folio S5-F2-C1, Foreign Tax Credit - Canada.ca.

We hope our comments are of assistance.

Yours truly,

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