Updated: Feb 2, 2022
Business travel into Canada has never been more prevalent than it is now. At the same time, governments around the world have never been more connected. With FATCA (Foreign Account Tax Compliance Act), over 30 countries agreed to swap information about accounts being held in their countries, so that the owners of those accounts can be taxed accordingly in their home tax system. This is an example of how governments of many countries are cooperating to ensure that they receive the tax that is due to them. Business travel is one area that is becoming more and more in the public eye. In the past, it was not difficult for someone in the US to simply drive up to the border, enter Canada, work or attend meetings for a couple of days, then drive home and carry on with their daily lives. However, the Canada Revenue Agency (CRA) has been increasingly vigilant with ensuring compliance for business travellers. It is no longer a far off thought that Canada Border Services might be talking to the CRA – in fact, they are sharing more information now than ever before.
Technically, if an individual is physically present in Canada for even part of one day, the CRA says that they should pay tax in Canada. For this reason, it is important for US employers to be fully aware of which employees are traveling to Canada, where they are, and for how long, so that they can they can ensure compliance with Canadian tax laws to avoid penalties. This can create a daunting administrative burden for the employer, especially in large companies, as it means that they need a method for tracking the movement of their employees. Today there are many ways to effectively track the business travel of employees. One method that has been growing in popularity recently is the use of smartphone apps, where employees can “check in” wherever they are, and the app accumulates and tracks their travel data. Tracking is imperative – the last thing an employer needs is for the Canadian government to tell them how much they owe based on travel data they’ve collected for employees.
Using the Tax Treaty
The majority of business travelers into Canada are coming from the US due to the close proximity of the two countries and the strong trade relationship. Canada and the US have a tax treaty in force, which is an agreement that they arrived at to ensure that there is no double taxation or tax evasion when it concerns income that is taxable in both countries. Citizens, green-card holders and residents of the US are taxed in the US on their worldwide income, including income that would have been earned related to short term Canadian business travel. If Canada taxes that same income, the individual would essentially be taxed twice. The tax treaty works to avoid this, and can be used to determine which country has the first right to tax the income.
In the case of business travel, the Canada-US tax treaty states that tax residents of the US are not to be taxed in Canada if the income they earned in Canada is less than $10,000. If they have more than $10,000 taxable in Canada, a second test can be used, in which you would look at the days of physical presence in Canada. If an individual is physically present in Canada for less than 183 days in a 12 month period AND the cost of the employees work in Canada is not charged back to the Canadian entity, then the income earned in Canada is not taxable in Canada. Business travel by definition is short intermittent travel into the country, so it is likely that most if not all business travel that a company might encouter would fall into the “tax exempt” category.
Now comes the tricky part. While the income earned by business travelers is typically tax exempt under the tax treaty, employers are technically required to withhold and remit tax for their employees for even one day of presence unless the CRA has specifically told them that there is no remittance required. So how do you tell the CRA that you don’t expect your employees to have a tax liability in Canada? You have to ensure that as a US entity you have a Canadian business number and ensure that a waiver is filed prior to the employee starting travel in the US. That waiver must be approved by the CRA before the business travel begins, so it is crucial that businesses are aware of not just where their employees are now, but where they will be soon. here are two kinds of waivers that can be used:
Form RC473 – “Application for Non-Resident Employer Certification”. This is typically called a “blanket” waiver, because it can be used to cover many employees at once. This is a relatively new form, introduced by the CRA just a few years ago after they recognized the massive burden it was for US companies to apply for individual waivers for each employee with business travel in Canada. It was not feasible or valuable for companies to do, so the CRA introduced a new blanket waiver to try to increase compliance by simplifying the process. This form is filed by the company and once approved allows a specified number of employees with less than 45 business travel days in Canada to be exempt from the withholding requirement for up to two years.
Form R102-R – “Regulation 102 Waiver Application”. If business travel of any individual employee exceeds 45 days, the company must file this form in order to request that the withholding requirement be waived. The form requests information such as the nature of the work performed in Canada and the amount of income earned while here, and it should be filed (at a minimum) 30 days before the business travel is set to begin. Because this form is done on an individual basis it can be more burdensome for employers to complete if they have many individuals falling into the “greater than 45 days” category. In addition, the individual the waiver is filed for also requires an Individual Tax Number (ITN). The ITN application can be attached to the Regulation 102 waiver application and filed at the same time.
Once the waiver is approved, the employee can travel into Canada and the employer will not have to withhold or remit Canadian taxes for them. If the waiver is not approved, the requirement to withhold and remit remains. Whether there is a waiver in place or not, the CRA would expect a T4 slip (Canada’s wage reporting slip, similar to the W-2) to be filed for each employee with greater than $10,000 of income earned in Canada. This typically applies to individuals with frequent travel or individuals who have a high salary, where even low travel into Canada might trigger the T4 requirement. If a T4 is issued to the employee, technically the employee should file a tax return. For this they will need an Individual Tax Number (ITN), and they would report the income earned in Canada according to the T4 and back the entire amount out, resulting in no taxable income and therefore no tax liability.
It is the responsibility of the employer to ensure that they are tracking their employees’ movements, filing the appropriate waivers on time, and issuing T4 slips as appropriate. It is the employees’s responsibility to apply for an ITN and file a tax return. As long as the employer does their part in being compliant, the CRA will not come looking for tax it thinks it is owed because they will see that the proper waivers are in place. It should be noted that the CRA will not approve waivers if there is an open issue of non-compliance, so it is best to be compliant from the very start. At Trowbridge, we have many clients who are just starting to send employees on business travel to Canada, and we also have many clients who have not been compliant and are working closely with us to ensure compliancy in the immediate future. Wherever you are in the process, we can help take the complication out of the process for you.