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You have Employees Conducting Business in Canada What you need to know October 5, 2017 Presented By: Pamela L. Cross, Borden Ladner Gervais LLP PCross@blg.com Brian Portas, Borden Ladner Gervais LLP BPortas@blg.com Association of Corporate Counsel www.acc.com
Overview Canadian tax implications for non-resident US employer Canadian immigration issues Canadian tax implications for employee Canadian tax implications for customers
Canadian tax implications for Non-Resident US employer Income Tax Act (Canada) ( ITA ): Part I tax Income of non-resident from carrying on business in Canada Override under Canada US Tax Treaty ( Tax Treaty ) Part XIII tax Withholding tax on passive income from Canadian source paid to non-resident Note: Province of Quebec administers its own tax regime
Carrying on Business in Canada Carrying on business not defined in ITA Common Law Definition from Jurisprudence: Facts and circumstances test Place where contract is made Location of operations Place where profits arise
Carrying on Business in Canada (cont d) Canada Revenue Agency s ( CRA ) list of criteria includes: Place of delivery of goods, services, or payment Location of assets Use of agent (employee) or independent contractor Intention Reasonable man test
Carrying on Business in Canada (cont d) Extended meaning of carrying on business in ITA s. 253 Produce, grow, manufacture, etc. Disposal of certain types of property Solicit orders or offer anything for sale in Canada (through agent or servant) Note: No requirement to have any assets physically in Canada
Carrying on Business in Canada (cont d) Canadian Excise Tax Act ( ETA ) imposes the Goods and Services Tax ( GST ) Canada s value-added tax ETA has a similar (but not identical) carrying on business test Note: many provinces are harmonized with federal ETA Note: Revenu Quebec administers both provincial (QST) and federal components Quebec Provincial business registration requirements: based upon presence in province, including whether nonresident carries on business in the province.
Carrying on Business in Canada (cont d) Implications of Carrying on Business in Canada: Non-resident must file Canadian income tax return, reporting worldwide income / expenses and allocating appropriate share to Canada Non-resident may be required to register for, collect and remit GST (and provincial sales taxes) on sales of goods and services Non-resident may have to make business registrations in provinces where it operates
Carrying on Business in Canada (cont d) Tax Treaty Override (for Income Tax only): Article VII - Business Profits taxable in Canada only if Non-resident carries on business in Canada through a Permanent Establishment ( PE ) Canada taxes only the profits which are attributable to the PE
Carrying on Business in Canada (cont d) So what is a PE? Fixed place of business, including: Place of management Office Branch Mine Oil or gas well, quarry or place of extraction of natural resources Factory Workshop
Carrying on Business in Canada (cont d) What is not a PE? For agents who are physically present in Canada look at authority to conclude contracts on behalf of non-resident. If agents have this authority, a PE may exist. Look for control over premises (i.e. office) i.e. does nonresident have physical control over premises in Canada, or is non-resident personnel simply visiting client s premises? Note: An independent agent (i.e. independent contractor) in Canada does not on its own create a PE Control of a Canadian subsidiary corporation does not on its own create a PE for parent
Carrying on Business in Canada (cont d) Under Treaty, there are specific connecting factors that do not, on their own, create a Permanent Establishment: Storage facilities Maintenance of stock or merchandise Purchase of goods or collection of information Advertising, supply of information or scientific research
Carrying on Business in Canada (cont d) Implications of Carrying on Business in Canada through a PE? Non-resident must file Canadian income tax return, reporting worldwide income and allocating appropriate share attributable to Permanent Establishment to Canada Non-resident still required to register for, collect and remit GST to CRA on sales of goods and services (under lower carrying on business test) Non-resident may have to make business registrations in provinces where it operates
Carrying on Business in Canada (cont d) Implications of Carrying on Business in Canada but not having a PE? Non-resident must file Canadian income tax return, reporting worldwide income, but claiming treaty-based exemption from Canadian income tax However, non-resident may be required to register for, collect and remit GST to CRA on sales of goods and services Non-resident may have to make business registrations in provinces where it operates
Canadian Immigration Canadian Work Permit Overview Business Visitors Labour Market Impact Assessment (LMIA) applications and common exemptions Temporary Resident Visas (TRVs), medical exams and other issues Misrepresentation and Searches
Canadian Work Permit Overview Generally speaking, an individual that is not a Canadian citizen or permanent resident of Canada must obtain a work permit in order to work temporarily in Canada Work is widely defined as an activity for which wages are paid or commission is earned, or that is in direct competition with the activities of Canadian citizens or permanent residents in the Canadian labour market
Business Visitors Some workers may qualify for entry to Canada as a business visitor without the need for a work permit A business visitor is: A foreign national who seeks to engage in international business activities in Canada without directly entering the Canadian labour market The primary source of remuneration remains outside Canada, the principal place of business is located outside Canada and the accrual of profits of the worker s employer is located outside Canada
Business Visitors Business visitors usually stay in Canada for a few days or a short period of time, provided they are taking part in international business activities without being part of the Canadian labour market Business activities covered by NAFTA include: Sales representatives and agents taking orders or negotiating contracts for goods or services for an enterprise located in the U.S. or Mexico but not delivering goods or providing services Buyers purchasing for an enterprise located in the U.S. or Mexico Discussions and negotiations respecting the sale, purchase, marketing, distribution, advertisement, procurement, transmission, transportation or packaging of goods or services
Business Visitors - Examples After-sales services Persons repairing and servicing, supervising installers, and setting up and testing commercial or industrial equipment (including computer software) Setting up does not include hands-on installation generally performed by construction or building trades (electricians, pipe fitters, etc.) Applies to persons seeking entry to repair or service specialized equipment, purchased or leased outside Canada, provided the service is being performed as part of the original or extended sales agreement, lease agreement, warranty, or service contract Warranty or service agreement Service contracts must have been negotiated as part of the original sales or lease agreements or be an extension of the original agreement Service contracts negotiated with third parties after the signing of the sales or lease agreement are not covered by this exemption Where the work is not covered under a warranty, a Work Permit and an LMIA are generally required
Business Visitors - Examples Intra-company training and installation activities Provide training or installation of equipment for a branch or subsidiary company Should maintain their position in their home branch Prohibition against hands-on building and construction work Board of Directors meetings Attending a meeting as a member of a board of directors They are legally charged with the responsibility to govern an organization or corporation by, for example: selecting and appointing a chief executive officer; governing the organization by setting broad policies and objectives
Labour Market Impact Assessments (LMIAs) BEFORE a foreign worker can apply for a work permit, the Canadian company must first obtain a positive LMIA from Service Canada UNLESS the employee can meet a specific exemption category from the LMIA process Processing times for LMIA s vary and could take 8-12 weeks to process, plus an additional 4 weeks if advertising is required If an LMIA is required, it could significantly delay the worker s entry into Canada
What is an LMIA? An LMIA confirms that the employer can fill the job with a foreign worker Service Canada considers whether: The job offer is genuine The wages and working conditions are comparable to those offered to Canadians working in the occupation Employers conducted reasonable efforts to hire or train Canadians for the job The foreign worker is filling a labour shortage The employment of the foreign worker will directly create new job opportunities or help retain jobs for Canadians The foreign worker will transfer new skills and knowledge to Canadians The hiring of the foreign worker will not affect a labour dispute or the employment of any Canadian worker involved in such a dispute
Minimum Advertising Requirements Established by Service Canada Can vary depending on the occupation (i.e. high wage occupations) Must provide proof of efforts to recruit Canadians or permanent residents: Copies of advertisements showing dates they were posted Recruitment Report listing number of candidates (Canadian citizen or permanent resident), interview, reasons for decision (why were they rejected?) Records of your efforts should be kept for a minimum of 6 years to demonstrate compliance in the event of an Employer Compliance Review (ECR) or Inspection
Additional Advertisement Efforts Service Canada reserves the right to require alternative or additional recruitment efforts such as increased duration (length of time) or broader advertisement (whether local, regional, or national) if it believes that additional efforts would likely yield qualified Canadian citizens or permanent residents who are available to work in the occupation and region.
The Call from Service Canada Every call may be different Officers often focus on advertising and recruitment efforts Be familiar with the application materials that were submitted Be ready to explain in your own words the kind of efforts that were made to recruit a Canadian citizen or permanent resident for the position
LMIA Exemptions Employer Portal, online Offer of Employment and Employer Compliance Fee Intra-Company Transferees (ICTs) Applicant has to have been with the company outside Canada continuously for at least 1 year in the previous 3 years in a similar full time position Must be transferred to a Canadian branch, affiliate, parent/ subsidiary of an international company Must be senior managers/executives or specialized knowledge workers (being workers that can demonstrate they have specialized knowledge of the employer s products or services)
LMIA Exemptions NAFTA Professionals Applies to professionals such as architects, accountants, engineers, etc. Must be citizens of the US or Mexico Must be qualified to work in their profession Must have pre-arranged employment or a contract with a Canadian employer Must provide professional level services in the field of qualification
Other Issues Where to apply for a Work Permit Visa office vs. Port of Entry (POE) Temporary Resident Visas (TRVs) Citizens of some countries are required to obtain a TRV in order to enter Canada Person must apply for the TRV at a visa office outside of Canada prior to appearing at a port of entry (could add several weeks processing time) Citizens of the US do not require a TRV but a worker coming from the US company may not be a US citizen
Other Issues Medical Exams Is the duration of the visit longer than 6 months? Has the person stayed in a designated country or territory for 6 or more consecutive months in the 1 year immediately preceding the entry date? Is the person coming to Canada to work in an occupation in which the protection of public health is essential? (or their spouse) workers in the health sciences field clinical laboratory workers patient attendants in nursing and geriatric homes medical students admitted to Canada to attend university medical electives and physicians on short-term locums teachers of primary or secondary schools or other teachers of small children domestics workers who give in-home care to children, the elderly and the disabled day nursery employees
Other Issues Criminal Inadmissibility Has the person ever committed, been arrested or been charged with any criminal offence in any country? Criminal offences include both minor and serious offences, such as theft, assault, and driving while under the influence of drugs or alcohol The person may not be allowed to enter Canada Medical Issues Does the person or a family member have any physical or mental disorder that would require social and/or health services during a stay in Canada?
2 Sample Scenarios Same company, similar position - could result in significantly different processing times depending on the situation Citizen of the USA hired as an Engineer Citizen of Egypt hired as an Engineer
Canadian Tax Implications for Employee Under ITA, employee is taxable in Canada on remuneration attributable to the performance of duties of any office or employment in Canada Employee needs to file Canadian income tax return Treaty exempts employment income earned in Canada from Canadian tax if certain threshold tests are met: the remuneration for employment in Canada is under Canadian $10,000; or The employment in Canada is carried out in less than 183 days in a given year and employer is not resident in Canada and remuneration is not borne by a permanent establishment/fixed base in Canada Waiver may be available where employee qualifies for Treaty exemption
Regulation 102 Withholding Every person paying remuneration to employees present in Canada must withhold in respect of employees' Canadian-source remuneration Withholding applies to non-resident and Canadian resident employers Withholding is at marginal rates (not a flat rate) Withholding obligation applies even if the employee ultimately exempt from Canadian taxation under a tax treaty (To obtain tax refund where treaty exemption available, non-resident employee must file tax return) Withholding applies to tax and possibly CPP/EI Employer and employee jointly liable for any unremitted tax Only exemption is where a Regulation 102 waiver is obtained. Note: Employer required to issue annual T4 slips to employees and file with T4 Summaries (subject to RC473 exception) In all cases, Employer must to register with CRA Penalties can be imposed for not withholding and reporting
Regulation 102 Waivers Three types of Waivers: 1 2 3 R102-J R102-R RC473 R102-J Waiver Simplified waiver process where employee is treaty exempt under the C$10,000 maximum income test in Canada U.S. Tax Treaty R102-R Waiver Used where requirement for R102-J Waiver is not met Non-resident employee s Canadian source compensation greater than C $10,000, but other conditions for treaty exemption apply
Regulation 102 Waivers (cont d) RC473 New in 2016 Available for up to 2 calendar years to qualifying employers Covers all employees qualifying for Treaty exemptions who are either: Working in Canada less than 45 days in a calendar year; or Present in Canada less than 90 days in a 12 month period.
Regulation 102 Withholding on Director s Fees Are director s fees paid to a non-resident subject to Regulation 102? Yes, director s fees constitute income from an office or employment What portion of director s fees paid to a non-resident of Canada are taxable in Canada? Taxable on fees attributable to duties performed in Canada Board retainer taxable based on workdays in Canada divided by total work days Fees for attending meeting taxable where meeting is held in Canada What if the director attended a meeting held in Canada by phone while physically located in the U.S.? For federal purposes, considered a U.S. workday and therefore not taxable For Quebec purposes, considered a Quebec workday if the meeting was held in Quebec (administrative practice)
Canadian Tax Implications for Customers Withholding on Services Payments to Non- Residents Payments to non-resident contractors Regulation 105: 15% withholding on fees paid by anyone to a non-resident for services rendered in Canada Additional 9% withholding if services rendered in Quebec (Regulation 1015R18) Waiver may be available where services provider qualifies for treaty exemption
Regulation 105: Withholding on Fees Paid to a Non-Resident for Services Rendered in Canada Applies to: any contract that includes services performed in Canada by a non-resident portions of services that a non-resident renders in Canada, even where contract includes services to be performed both in Canada and out of Canada services that non-resident is contractually obliged to perform in Canada, even if non-resident subcontracts some or all of them to another Excludes remuneration paid to employees Can result in cascading withholding Not a final tax, but a pre-payment of non-resident Part I tax
Bundled Contracts Contracts with non-residents may include: both goods and services services to be performed in Canada and out of Canada services which the contractor further subcontracts reimbursement of out-of-pocket expenses Careful drafting to ensure Regulation 105 withholding applies only to fees for services performed in Canada Subcontractor can be a resident or non-resident
Regulation 105 Waiver Non-resident must obtain waiver before receiving payment for services rendered Waiver does not relieve non-resident from withholding on secondary services (e.g., to a subcontractor) or from T4A-NR reporting requirement Two types of waivers are available: Treaty-based waivers Series of tests that must be met in Information Circular 75-6R2 Income and expense waivers Tax calculated at actual rates based on estimated income net of expenses
Regulation 105 Waivers Eligibility: Service provider must establish residency in a treaty country Service provider must show entitlement to treaty benefits If they do not qualify for treaty benefits, may still apply on the basis that withholding would exceed tax otherwise payable Result of waiver: No need to withhold Payer still must comply with reporting requirements Non-resident still must file income tax return, even if no tax is payable
Regulation 105 Gross-Up Clauses Where payer contractually obligated to make Regulation 105 remittance to CRA on top of agreed fee, withholding must be calculated on a grossed-up basis Payer may add a keep whole clause to agreement to recoup any Regulation 105 refund
Regulation 105 Jurisprudence - Weyerhaeuser Company Limited v. The Queen, 2007 TCC 65 Facts Taxpayer paid non-resident for services rendered in Canada Taxpayer did not withhold on reimbursements of out-of-pocket and travel expenses identified on the invoices Minister assessed withholding on reimbursements on the basis that payments were made in respect of services rendered in Canada Decision Reg 105 must be read in the context of paragraph 153(1)(g) withholding applies only to fees and other amounts for services withholding does not apply to reimbursement of expenses Generally, an invoice separating fees for services performed in Canada from other fees will be sufficient for payer to limit withholding to such fees
Questions? Pamela Cross, Partner BLG Tax Group 613.787.3559 pcross@blg.com Brian Portas, Partner BLG Labour & Employment Group 403.232.9705 bportas@blg.com
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