Undeniably, the world of work has changed. Remote work was gaining popularity pre-pandemic, but in March 2020 it quickly became a necessity. Statistics Canada estimates that approximately 40% of Canadian jobs can be done remotely, so when COVID-19 started its rapid spread in Canada, most people that could work from home, did.
Two and a half years later, the world has started to move past the pandemic but many of the people that could work from home are still there. Somewhere along the way, workers started to prefer the flexibility that comes from remote work. Not only that, but 90% of workers reported being at least as productive working from home as they were in the office. The ability to work remotely has also benefited employers. The “Great Resignation” and widespread talent shortages have made finding the right people to do the job more difficult than ever. Thanks to remote work, employers can now look for candidates beyond their immediate geographical area. This is a major shift, but it is the future of work.
While offering the ability to work remotely can make employers appear more attractive to current and potential employees, there are some major tax implications that need to be considered. When the employee earning the income is physically located in another country, where do they pay tax? How does the employer need to report that income? It’s more complicated than it appears, and if employers are offering remote work, they must consider the impact on tax and compliance or risk being offside.
How is Employment Income Taxed?
Generally speaking, employment income is taxed where it is physically earned. In some instances, tax treaties are available to change this treatment in a cross-border scenario. However, where remote workers permanently reside in another country than the employer, it is not likely tax treaties will apply. Typically, then, the employment income the employee earns is taxable in the country where they live and work.
What does the Employer have to do Differently?
Unfortunately, a lot! While technology allows remote workers to seamlessly integrate with the domestic team, the tax and payroll considerations may be significant.
For example, if a US company has a remote employee living and working in Canada, Canada has the first right to tax that income. The US company must consider the following:
Appropriate taxes must be remitted to the Canadian authorities. If they do not, and they continue withholding and remitting US taxes as they do for their domestic population, the employee will have a mismatch of taxes when filing their tax returns. They would have income taxable in Canada with no Canadian tax withheld, resulting in a large balance due. On the US side, they would not have US source income but they would have US tax withheld, resulting in a large refund. Due to this cash flow issue, the employee may need to wait for their US refund before paying their Canadian tax balance, which may result in penalties and interest depending on the timing of the payments.
To withhold and remit Canadian tax, the employer may need to set up a separate Canadian payroll, or a shadow payroll. They must also issue a T4 slip for the employee to report their Canadian employment income and tax withholdings. This may prove challenging for a company that has only ever administered a domestic payroll.
To run a Canadian actual or shadow payroll, the company is required to register for a business number and payroll account in Canada, if they don’t already have one. This effectively puts the US company “on the map” of the Canadian authorities, and the Canada Revenue Agency would look to ensure that the US company is compliant in all respects.
This presence in Canada must be carefully considered as to what this means for the company itself from a corporate reporting perspective. For example, does having this remote worker create permanent establishment issues in Canada? Does the company need to file a tax return in Canada?
Certainly, there is a lot to consider when it comes to the tax implications of employing a remote worker. But what if the company did nothing? Besides the cash flow issue created for the employee that we discussed above, the company is also at risk of being assessed penalties and interest for non-compliance. The penalty for under remitting Canadian tax is 10% of the amount that should have been withheld (for a first offense) or 20% of the amount that should have been withheld (for continuing offenses). There is also a penalty assessed for failure to report employment income on a T4. The penalty depends on the number of slips not filed. If the company intends to do business in Canada at any point in the future, it is best to be compliant from the outset to prevent trouble later on.
Remote work is here to stay, there is no doubt. It can make a company more attractive to potential employees, and it allows the employer to open up the pool of candidates. The tax considerations, while numerous, are manageable with the right plan and systems in place. At Trowbridge, our Global Mobility team is ready to help you navigate this to ensure proper tax compliance in Canada. We can also assist with administering a Canadian payroll and facilitating payments to the Canadian tax authorities. If you are an employer thinking about hiring a remote worker, or if you already have some, please reach out to our team today and we will let you know how we can make it easier.
Director, Global Mobility Services
TEL: 416-214-7833 Ext: 108