Updated: Feb 2
2020 has been a difficult and strange year around the world. For the globally mobile employee and their employers, the COVID-19 pandemic put a wrench into all sorts of plans and routines. Business travel to and from Canada has effectively come to a halt. Restrictions at the Canada-US border resulted in many employees working in Canada to be “stuck” here for a period of time. Many Canadian citizens who would ordinarily be working abroad have decided to return to Canada to ride out the pandemic with their families.
This article discusses the impact this pandemic has had on Canadian citizens who have returned to Canada, both in regard to their personal Canadian tax liability, and the obligations their employers now have from a payroll perspective because of this arrangement. The ability to work remotely has allowed these employees to largely carry on their work for their “host” country seamlessly while being physically situated in Canada, but what impact does the change in geographic locale have on tax reporting?
The answer is…a LOT! Canada taxes based on residency. This means that residents of Canada are taxed on their worldwide income, and non-residents (deemed or factual) are taxed on only income that they earn from Canadian sources. Income earned from Canadian sources includes income generated from certain property located in Canada (such as a Canadian rental property, or dividends from Canadian corporations), and it also includes income generated related to days spent physically working in Canada.
The Case of Mr. B
To focus our discussion, we will use a fictional example – Mr. B. Mr. B left Canada in 2018 with his family, to start a 3 year assignment in the US. His Canadian employer needed him to work in their US branch for a few years. In 2018, he sold his home in Canada, and he, his spouse and 2 kids all moved together. He and his family became factual non-residents of Canada as of the date they moved. He switched onto the US payroll. The family did not plan to come back until Mr. B’s assignment was done in the fall of 2021. Fast forward to March 2020 when everything changed. Mr. B and his spouse made the quick decision to come back to Canada – they had heard that their prime minister was advising Canadian citizens to return while they still could, or risk being stuck where they were. Without much thought, they flew back to Canada. After all, Mr. B could still work remotely doing his same US role, and schools were closed anyway – it seemed like an easy decision. It is now November 2020, the second wave of the pandemic is in full swing, and Mr. B and his family are still staying in Canada at Grandma and Grandpa B’s house. They are waiting for things to calm down a bit and they plan to go back to the US to finish out Mr. B’s assignment.
Of course, in March 2020 Mr. B was not thinking about what impact this would all have on his tax situation. He was much more worried about keeping his family safe and happy. He knew that he was a non-resident of Canada, and he was still carrying out his US role and being paid from his US host employer so nothing had really changed besides where he was physically working from. Unfortunately, his tax situation is much more complex than he realizes! As we’ve portrayed, a Canadian non-resident is taxed in Canada on their Canadian source income. Under the normal terms of his assignment, Mr. B was required to travel to Canada infrequently for meetings. Now as a result of the pandemic, Mr. B has been physically working in Canada since March! That, under normal circumstances, would be Canadian source income – that is, Canada has the first right to tax it.
Special COVID Guidance
Now, we said “in normal circumstances” for a reason – 2020 is anything but normal. The Canadian government knew that the very situation Mr. B found himself in was very common in this strange pandemic year. Many governments around the world were coming out with explanations and exceptions to the treaties and domestic tax laws that would ordinarily hold true, because of course, they were presented with extenuating circumstances due to this unprecedented situation the world was collectively facing. In May 2020, the CRA announced some guidance specifically related to international income tax issues raised by the COVID-19 crisis (https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/guidance-international-income-tax-issues.html). One of the issues discussed related to cross-border employment income. In Article XV of the Canada-US tax treaty, the two governments have agreed that income earned in one country (in Mr. B’s case, Canada) would not be taxable in that country under the following circumstances:
1. The income earned in that country is less than $10,000 (local currency), OR;
2. The individual spent less than 183 days physically present in Canada in a rolling 12 month period, AND the remuneration is not borne by an employer who is resident in Canada or an employer that has a permanent establishment in Canada.
Pre-pandemic, if Mr. B had to work in Canada for a few days here and there (as was the plan), his income would not be taxable in Canada under the Canada-US tax treaty because he would have been in Canada for less than 183 days in a rolling 12 month period and his remuneration was not borne by a Canadian entity in any capacity. Now in November and still in the midst of the pandemic, Mr. B has been in Canada since March, far exceeding the 183 days stipulated in the treaty. By default, he would be taxable in Canada because he would no longer fall under that treaty article. However, the special guidance issued by the CRA in May 2020 specifically addressed this problem. They said that if an employee was working in Canada as a result of the pandemic, and they would not have ordinarily been here otherwise, then the days they spend physically working in Canada from March 16, 2020 are not to be counted toward the 183 days stipulated in Article XV of the treaty. Great news for Mr. B! This means that he still falls under the terms of the treaty, and his income is not taxable in Canada. Well, not so fast.
The End of the Special Measures
In May when these special rules were put in place, the CRA did so knowing that this was not a permanent circumstance – this was a temporary measure put in place to simplify tax reporting in a time when everything was up in the air. It was also reciprocal because many other governments around the world were doing the same. Nobody knew how long the border would be closed, or how long this pandemic would rage on. Here we are in November and we still don’t have an end in sight. The CRA extended their end date for this guidance several times (as they had with the Canadian tax payment deadline). With no end in sight to the pandemic and borders still closed, they decided to put an end to the special COVID exemptions as of September 30, 2020.
In a recent development (obviously this situation is very fluid and dynamic!), on October 15 the CRA clarified that the September 30 end date would not apply to persons in Mr. B’s exact situation – an employee of a non-resident company who himself is a non-resident of Canada. Rather the CRA has indicated that the end date for those in this situation would be the earliest of the following:
the day the non-resident employee returned or was able to return to their jurisdiction of residence;
the day specified on a Regulation 102 waiver relieving the non-resident employee from the relevant Canadian withholdings;
the day the non-resident employer was certified by the Minister as a qualifying non-resident employer and the non-resident employee was also a qualifying non-resident employee, or;
December 31, 2020.
Where does this leave Mr. B? From March 16, 2020 to September 30, 2020, the days Mr. B spent physically working in Canada are not to be counted toward the 183 days stipulated in Article XV of the treaty. This is good. The October 15 updated guidance from the CRA would also suggest that after September 30 the special rules still apply even though Mr. B is still physically working in Canada. It is very important to note that the treaty article specifically mentions 183 days in a rolling 12 month period. This means that the days count does not simply restart when the tax year ends. Rather, the 183 days count continues and can straddle two tax years. Mr. B has to keep tracking his days spent physically in Canada because if his days exceed 183, his income is taxable in Canada for that period. Remember, the 183 days are not working days only, but all days of physical presence. In view of this, Mr. B should try to get back to the US as soon as possible but no later than December 31, 2020, to stay within the criteria of the treaty. It is unknown when the borders will reopen, but it no longer matters – the clock is ticking!
The Impact on Employers
What does this mean for Mr. B’s US employer? Canada has very strict payroll reporting requirements. A non-Canadian employer is required to remit Canadian tax for even 1 day an employee works in Canada. Normally if the treaty is expected to apply then a waiver can be applied for (Regulation 102 waiver, or an RC473 “blanket waiver”) to request that the CRA waive the requirement to remit on treaty-exempt income. Many non-Canadian employers would not ordinarily have employees working in Canada and did not know the rules. In absence of an approved waiver, there is a requirement to remit Canadian tax for this employee working in Canada, whether the treaty applies or not. Non-compliance to this rule results in an under-withholding penalty of 10-20% of the amount that should have been remitted. Approved waivers should be in place before the employee even sets foot in Canada.
In the early days of the pandemic, however, everything was chaos. Employers didn’t know where their employees were. They let employees go to their home countries because what else could they do – this was for the health and wellbeing of their people, which trumps everything when faced with such upheaval and uncertainty. The CRA themselves were shut down for a period of time, creating a massive backlog of waiver applications, tax returns, and everything else. The CRA has since reopened but they are still trying to come out of this backlog. With their October 15 update, the CRA clarified that they will NOT assess an under-remittance penalty when there is no waiver due to these special circumstances. In general, it is hoped that, like the loosened special COVID guidance, the CRA is understanding of the strange circumstances that many employers found themselves in this year. As always, employers should aim for compliance – that means applying for waivers as appropriate and issuing employees a T4. Note that waivers of this nature are not typically approved retroactively. The CRA usually approves them from the date they receive the application. As such, if a waiver is required it should be applied for as soon as possible.
The story of Mr. B and his time unexpectedly working in Canada is just one of many complex situations we have encountered this year. The CRA’s international guidance related to the COVID-19 pandemic is fairly extensive and there is much more to cover that is relevant for globally mobile employees and their employers. Trowbridge’s Global Mobility Team specializes in Canadian income tax and payroll issues in the global mobility sphere. This year has raised some very unique challenges for both employees and employers. As always, we are happy to help navigate the ever-changing guidelines that employers face in their efforts to remain compliant during these times of unprecedented change.