Non-Resident Employees in Canada, Be Aware of ITA Regulation 102
According to Statistics Canada, in the year 2013 more than 25 million non-residents individuals (including U.S. persons) visited Canada; it is likely that out of these 25 million a significant number of individuals visited Canada for work purposes as an employee and received ‘Canada-sourced’ income.[i]
It is important for non-resident employees working in Canada, and their employers to understand the tax regulations associated with working in Canada and thereby receiving Canada-sourced income for their services. Often, companies are not aware that they actually have employees in Canada as they are unaware of filing requirements for private contractors and similar employment situations; it is best to contact a tax professional to advise in such situations.
AG Tax professionals have prepared a brief article on Regulation 102 of the Canadian Income Tax Act that non-resident employees and their employers need to comply with.
Regulation 102 of the ITA of Canada
Regulation 102 of the Canadian Income Tax Act (ITA) requires that every employer employing non-resident individuals as employees withhold a percentage of the compensation paid for the employee’s services performed in Canada as federal and provincial income tax withholding, and Canada Pension Plan (CPP) and Employment Insurance (EI) Premiums, until and unless a waiver by the Canada Revenue Agency (CRA) has been issued.[ii]
The employer must maintain a Canadian payroll, and issue T4 slips (Statement of Remuneration Paid) to the non-resident employees stating the salary paid, deductions made, and any taxes withheld, irrespective of a waiver. A T4 Summary of Remuneration Paid (T4SUM) must be filed with the CRA by the employer by the last day of February in the year following the year in which the payments were made. Employees, both resident and non-resident, must be provided with a copy of their T4 information slips by the last day of February. The IRS has placed intense scrutiny in this area and are clamping down on non-compliant businesses.
It may happen that the employer is also not a Canadian resident, even then the non-resident employer may still be required to comply with T4 and T4SUM reporting and withhold taxes and benefits from the employee’s portion of remuneration for services performed in Canada since the income is ‘Canada-sourced’.
Form R102-J, Regulation 102 Waiver Application (Joint Employer/Employee)
Non-resident employees from countries with which Canada has a tax-treaty may apply jointly with their employer for a Regulation 102 waiver of employee withholding if either of the below mentioned conditions are met:
1. Total remuneration (in Canadian currency) to be paid to the employee for employment duties performed in Canada does not exceed CAN $10,000 if the employee is a resident of the United States;
Or
2. Total remuneration (in Canadian currency) to be paid to the employee for employment duties performed in Canada does not exceed CAN $5,000 if the employee is a resident of another country that has a tax treaty with Canada that exempts this employee from tax in Canada.[iii]
Form R102-J is used when an employee will be exempt from tax in Canada under a tax treaty and it is not practical to apply for an R102-R waiver or the required individual tax number (ITN) or social insurance number (SIN) before the start of services, due to the nature of the services being performed such as servicing of equipment as needed; consulting; or services for which the dates and names of employees coming to Canada cannot be determined until the last minute. In these types of situations, the CRA can issue a R102-J waiver with a date that is effective before the date of application.
Note that corporations that pay their sole or primary shareholder for employment services cannot use Form R102-J and non-residents in the film industry have to use Form R106, Regulation 102 Waiver Application – Film Industry.
Form R102-R, Regulation 102 Waiver Application
A non-resident employee that meets or exceeds the $5,000 threshold ($10,000 for U.S. residents) above may still apply for a Regulation 102 waiver if the non-resident resides in a country that has a tax treaty with Canada (that will exempt an employee’s income from tax in Canada) by completing and filing Form R102-R, Regulation 102 Waiver Application, with the CRA.
A completed and signed Form R102-R must be submitted 30 days before either the start of the employment services in Canada or the initial payment for the employment services. The effective date of the Form R102-R waiver will be the date that the waiver application is approved so therefore the employer should withhold taxes until receipt of approval from the CRA.
Maintain Records[iv]
Non-resident taxpayers should keep supporting documents such as T4 slips for at least 6 years since the CRA may request for it in order to verify the claimed deductions or credits. Although there have been times when the CRA has accepted bank statements and cancelled cheques as proof, you should always keep official documents and receipts for a minimum of 6 years.
Penalties and liability
If the employer, whether or not a resident of Canada, fails to comply with ITA Regulation 102 they may be subject to severe penalties which are as follows:
Liable for the whole amount of withholding
The employer, whether a resident or non-resident of Canada, who fails to deduct and remit an amount as required by paragraph 153(1)(a) of the Act and Regulation 102, will be held liable for the whole amount together with any interest and penalties.
Non-compliance in deducting or remitting payroll taxes
10% on the amount the employer failed to deduct or remit for the first time, which would be increased to 20% for any following omissions.
3. T4 Slips
Penalties are assessed according to the total number of slips not filed and/or were late, which may vary from $100 to $7,500.
Interest charges may apply based on prescribed rates on date payment is due.
AG Tax LLP Can Help
Tax situations can be complicated, and complying with the tax regulations of another country may be stressful especially if there are possibilities of double taxation, and penalties for non-compliance.
As a non-resident person who has recently started working in Canada, or frequently visit Canada from U.S. for work and receive Canada-sourced income, it is advisable that you consult a tax professional to help you be compliant with the Canada Revenue Agency (CRA), and avoid a tax situation.
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
• Canadian Personal and corporate tax returns
• Cross Border Taxation and Business Planning
• U.S. Personal and Corporate Taxation
• Disclosure of Foreign Assets and other information filings
• Retirement planning
• Estate Planning, Inheritance tax advice
Please contact any of our offices across Canada at 604-538-8735 (Greater Vancouver), 780-702-2732 (Edmonton and Alberta), or 416-238-5920 (Greater Toronto) to arrange for an appointment to discuss your tax related queries, and talk to Peter Aylett.
[i] http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/arts34-eng.htm
[ii] http://www.cra-arc.gc.ca/E/pub/tp/ic75-6r2/ic75-6r2-e.html#P241_36110
[iii] http://www.cra-arc.gc.ca/E/pbg/tf/r102-j/r102-j-11e.pdf
[iv] http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/kpng/menu-eng.html