Canadian application for non-resident employer certification
TAX ALERT |
Non-resident Canada employers have Canadian withholding requirements under Regulation 102 applicable to their employees providing services in Canada. The Canada Revenue Agency (“CRA”) recently released Form RC473, Application for Non-Resident Employer Certification, to reduce the administrative burden of Regulation 102 for non-resident employers and employees if certain conditions are met. A summary of Regulation 102 and the new guidelines surrounding non-resident employer certification are noted below. Qualifying employers that file Form RC473 to arrive at the CRA office by March 1, 2016 may be granted relief retroactively to January 1, 2016, so employers should consider filing before March 1st.
Regulation 102 Obligations
Regulation 102 of the Canadian Tax Act provides that all employer payers of amounts paid to individuals working in Canada are required to withhold, remit, and report on such payments to the CRA. This includes non-resident payers, even if the payer and non-resident employee are not subject to Canadian taxation. To recuperate amounts withheld, non-resident employees must file a Canadian Individual Income Tax Return (Form T1) to obtain a full refund of his/her withholding provided they are not otherwise taxable in Canada. Historically, in order to absolve oneself from withholding requirements, the employee was required to obtain a Regulation 102 Waiver by filing an application on Form R102-R or R102-J. The Regulation 102 Waivers could be requested if employees would be working in Canada and this activity is anticipated to be exempt from Canadian taxation pursuant to a tax treaty. The Regulation 102 Waiver process is administratively burdensome as it is completed on an employer and employee basis, requires the employee to obtain a Canadian taxpayer identification number and generally needs to be applied for before the specific employee travels to Canada.
Non-Resident Employer Certification
On January 12, 2016, CRA issued Form RC473. Form RC473 was developed as a result of a proposed amendment to the Canada Income Tax Act announced in Budget 2015. If the amendments become law, they will be effective for payments made after 2015 or as of the dates given. This proposed amendment provides an exception to the employer’s Canadian withholding obligation for qualifying non-resident employers paying qualifying non-resident employees who are working in Canada but exempt from paying income tax in Canada under a tax treaty. The process is employer based therefore the employer requests certification from CRA to be a qualified non-resident employer and the employer maintains detailed records as noted below such as employees’ time spent in Canada and related wages, rather than providing employee details to the CRA as is the case with the Regulation 102 Waiver process.
Qualifying Non-Resident Employee
A qualifying non-resident employee:
- is resident in a country with which Canada has a tax treaty at the time of payment (e.g. the United States);
- is not liable to income tax in Canada because of the tax treaty under which the employee is resident; and
- either works in Canada for less than 45 days in the calendar year that includes the time of payment, or is present in Canada for less than 90 days in any 12-month period that includes the time of payment.
The tax exempt requirements of the U.S./Canada Income tax treaty are as follows:
- U.S. person earns less than CAN$10,000 in Canada within a calendar year or
- U.S. person works in Canada for less than 183 days in a 12 month period and is paid by a company that does not have a taxable presence in Canada.
Qualifying Non-Resident Employer
A qualifying non-resident employer:
- is resident in a country with which Canada has a tax treaty at the time of payment or if the qualifying non-resident employer is a partnership, at least 90% of the partnership’s income or loss for the fiscal period at the time of payment is allocated to partners that are resident in a country with which Canada has a treaty; and
- has been certified by the Minister of National Revenue
In order to be certified by the Minister of National Revenue, an employer must complete Form RC473 and be approved by CRA.
Obligations of a Qualifying Non-Resident Employer
Upon certification as a qualified non-resident employer, the non-resident employer must:
- track and record the number of days each qualifying non-resident employee is either working in Canada, or is present in Canada, and the income attributable to these days (or any other criteria relevant to applying the treaty exemption) on a proactive basis [see tax exempt requirements for employees under the U.S./Canada income tax treaty above];
- determine if the employee is resident in a country with which Canada has a tax treaty;
- evaluate and document if the qualifying non-resident employee’s remuneration is expected to be exempt from tax in Canada under a tax treaty between Canada and the employee’s country of residence;
- determine if the qualifying non-resident employee either works in Canada for less than 45 days in the calendar year that includes the time of the payment, or is present in Canada for less than 90 days in any 12-month period that includes the time of payment;
- obtain a Business number and, if required to make remittances, a program account number for payroll purposes;
- complete and file a T4 Summary and Information Return for those employees who have provided employment services in Canada that are not excluded from withholding under these new guidelines providing for qualified non-resident employees and employers.;
- file the applicable Canadian income tax returns for the calendar years under certification;
- upon request, make the employer’s books and records available in Canada for inspection by the CRA for the purpose of administering the employer certification agreement and the withholding requirements in accordance with the Income Tax Act and Regulation 102.
If an employer is not certified as a qualifying non-resident employer or the employee is not a qualifying non-resident employee, Canadian Regulation 102 withholding will be required on non-residents working in Canada. Additionally, if an employee is expected to be a qualified non-resident employee but later does not meet the definition of a qualified non-resident employee (i.e. employee works in Canada over 45 days in the calendar year), CRA will need to be notified immediately. In these cases, if the employee working in Canada is anticipated to be exempt from Canadian taxation pursuant to a tax treaty, in order to be exempt from the Regulation 102 withholding requirement, the employer and employee would need to follow the Regulation 102 Waiver procedure to request an exemption from Regulation 102 withholding for that employee. If granted, this Regulation 102 Waiver exemption from withholding is only allowed on the wages for each employee for which the Regulation 102 Waiver was approved.
To become certified as a qualifying non-resident employer, send a completed Form RC473, Application for Non-Resident Employer Certification to the Vancouver Tax Services Office. If the certification request is approved, Canadian withholding would not be required on the employment income paid to qualifying non-resident employees for their work in Canada during the period of certification. The non-resident employer certification will be valid for up to two calendar years. As a transitional measure, CRA has noted that all Forms RC473 received by the CRA before the end of day on March 1, 2016 will be considered for a retroactive effective date of January 1, 2016.
As noted earlier, the Form RC473 was developed as a result of proposed legislation. Although the legislation is not yet passed, it is suggested that Form RC473 be filed if it is anticipated that Regulation 102 withholding may apply and employees in Canada expect to be qualified non-resident employees. It should be noted that given that the legislation is proposed, the CRA may not process these requests until the proposed legislation is enacted into law.