Payroll audits are increasing and one of the most vulnerable ares of exposure is compliance for foreign employees working in Canada
In an age of global organizations, global projects and global resources, organizations are more integrated than ever and are willing to send employees where the greatest business needs are. If your organization is impacted by cross border employees — are your compliance risks being managed?
During a recession a government must still deliver on its core responsibilities, even when the workforce shrinks.
In order to increase their tax revenues in this environment, the Canadian tax authorities have decided to go after companies that are not being compliant. Payroll audits are on the increase —and one of the most vulnerable areas of exposure is payroll compliance for foreign employees working in Canada.
Basic rule
Compensation paid to non-resident employees who provide services in Canada is subject to the same income tax withholding, remitting and reporting obligations as that paid to Canadian-resident employees. These obligations also apply to non-resident companies that employ either resident or non-resident employees in Canada.
Who are these employees? Generally, these are individuals on foreign payroll who travel on a regular or project basis into Canada without a defined assignment structure in place.
They may work in Canada for just a few days, weeks or months. They usually come on the request of a specific business unit, and as such travel below the radar of both home and host human resources, finance and payroll teams.
What income needs to be considered? These individuals may receive compensation from various sources, such as home payroll, host payroll, a third-party relocation company and expense reports.
All compensation must be accumulated and Canadian taxability must be assessed for each of the compensation items.
For example, under Sub-section 6(6) of the Canadian Income Tax Act, some board and lodging (housing) payments are not taxable if certain conditions are met.
The amount of income subject to Canadian tax is generally determined on a pro-ration of wages earned, based on the number of workdays in Canada as a proportion of total workdays in the year.
Will the individual be taxed in both home and host countries on the same income? Most countries have agreements in place to prevent double taxation.
These agreements address which country has the first right to tax for employment income depending on the nature of the employment, the number of work days and other related facts.
It is important to determine whether the employment income is exempt pursuant to an income tax treaty between Canada and the individual’s home country.
If an individual is exempt from tax on the employment income earned in Canada, they can request a tax deduction waiver to reduce or eliminate the company’s requirement to withhold. In addition to income tax, social taxes and employment insurance need to be addressed.
Similar to income tax treaties, countries have social security agreements to prevent double contributions.
Canada has such agreements with various countries (Quebec has its own such agreements).
Companies should consider obtaining a certificate of coverage in the home country to obtain an exemption from the Canadian social security scheme.
What needs to be remitted? Once all relevant employment income has been assessed for Canadian taxability, income taxes need to be calculated on graduated tax rates (unless exempt) and remitted periodically based on the company’s remittance frequency.
Companies also have to determine whether the income of these individuals will be subject to provincial health tax, worker’s compensation or any other provincial tax levies.
Taming complexity
First and foremost, it is important for the company’s leadership to give due consideration to the risk exposure.
The exposure goes beyond financial penalties and can significantly affect the internal and external reputation of the company.
Second, there should be a short-term and business traveller policy that considers the company’s risk tolerance and addresses how and when a business traveller is identified, and an approach to comply with immigration, income tax and payroll legislation.
Third, it is important HR, line managers and applicable employees be educated on this policy and various steps that need to be addressed when an employee is travelling to Canada.
Shadow payroll is one common approach to meet cross-border payroll withholding, remitting and reporting obligations for employees who work in Canada but are not paid through Canadian payroll.
Companies must understand the employment tax rules are complex and constantly evolving. And adherence to the payroll compliance rules is not optional.
Edward Rajaratnam is with the human capital practice at Ernst & Young LLP. Ernst & Young’s Canadian Human Capital practice consists of professionals across the country who assist companies with immigration, global mobility tax and employment tax services. He can be reached at (416) 943-2612, [email protected] or visit www.ey.com/ca/HumanCapital for more information.
During a recession a government must still deliver on its core responsibilities, even when the workforce shrinks.
In order to increase their tax revenues in this environment, the Canadian tax authorities have decided to go after companies that are not being compliant. Payroll audits are on the increase —and one of the most vulnerable areas of exposure is payroll compliance for foreign employees working in Canada.
Basic rule
Compensation paid to non-resident employees who provide services in Canada is subject to the same income tax withholding, remitting and reporting obligations as that paid to Canadian-resident employees. These obligations also apply to non-resident companies that employ either resident or non-resident employees in Canada.
Who are these employees? Generally, these are individuals on foreign payroll who travel on a regular or project basis into Canada without a defined assignment structure in place.
They may work in Canada for just a few days, weeks or months. They usually come on the request of a specific business unit, and as such travel below the radar of both home and host human resources, finance and payroll teams.
What income needs to be considered? These individuals may receive compensation from various sources, such as home payroll, host payroll, a third-party relocation company and expense reports.
All compensation must be accumulated and Canadian taxability must be assessed for each of the compensation items.
For example, under Sub-section 6(6) of the Canadian Income Tax Act, some board and lodging (housing) payments are not taxable if certain conditions are met.
The amount of income subject to Canadian tax is generally determined on a pro-ration of wages earned, based on the number of workdays in Canada as a proportion of total workdays in the year.
Will the individual be taxed in both home and host countries on the same income? Most countries have agreements in place to prevent double taxation.
These agreements address which country has the first right to tax for employment income depending on the nature of the employment, the number of work days and other related facts.
It is important to determine whether the employment income is exempt pursuant to an income tax treaty between Canada and the individual’s home country.
If an individual is exempt from tax on the employment income earned in Canada, they can request a tax deduction waiver to reduce or eliminate the company’s requirement to withhold. In addition to income tax, social taxes and employment insurance need to be addressed.
Similar to income tax treaties, countries have social security agreements to prevent double contributions.
Canada has such agreements with various countries (Quebec has its own such agreements).
Companies should consider obtaining a certificate of coverage in the home country to obtain an exemption from the Canadian social security scheme.
What needs to be remitted? Once all relevant employment income has been assessed for Canadian taxability, income taxes need to be calculated on graduated tax rates (unless exempt) and remitted periodically based on the company’s remittance frequency.
Companies also have to determine whether the income of these individuals will be subject to provincial health tax, worker’s compensation or any other provincial tax levies.
Taming complexity
First and foremost, it is important for the company’s leadership to give due consideration to the risk exposure.
The exposure goes beyond financial penalties and can significantly affect the internal and external reputation of the company.
Second, there should be a short-term and business traveller policy that considers the company’s risk tolerance and addresses how and when a business traveller is identified, and an approach to comply with immigration, income tax and payroll legislation.
Third, it is important HR, line managers and applicable employees be educated on this policy and various steps that need to be addressed when an employee is travelling to Canada.
Shadow payroll is one common approach to meet cross-border payroll withholding, remitting and reporting obligations for employees who work in Canada but are not paid through Canadian payroll.
Companies must understand the employment tax rules are complex and constantly evolving. And adherence to the payroll compliance rules is not optional.
Edward Rajaratnam is with the human capital practice at Ernst & Young LLP. Ernst & Young’s Canadian Human Capital practice consists of professionals across the country who assist companies with immigration, global mobility tax and employment tax services. He can be reached at (416) 943-2612, [email protected] or visit www.ey.com/ca/HumanCapital for more information.
