Hot Tax Issues and
Challenges – Mobility to
and from Canada
Bill Fridfinnson
February 21, 2013
Hot Tax Issues and Challenges
Agenda
1. Non-resident Travelers to Canada
2. Overseas Employment Tax Credit – Impact of Phase-out
3. Tax Considerations of Temporary Living Costs
4. Stock Option Plans - Issues and Challenges
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Hot Tax issues and Challenges – Mobility to and from Canada
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Non-resident
Travelers to Canada
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Non-resident Travelers to Canada
Reg 102/ Waivers
(HR-Payroll)
PE/Services PE
(Corporate)
Reg. 105/Transfer
Pricing
(Corporate)
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Hot Tax issues and Challenges – Mobility to and from Canada
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Current State – Regulation 102 Rules
Under Regulation 102 of the ITA, every person (corporation,
partnership, other legal entity) paying remuneration to nonresident employees working in Canada must withhold
Canadian income tax at source on the Canadian source
earnings.
• Withholding obligation applies to non-resident employers.
• Any amount of Canadian source income is subject to the rules….there
is no deminimus amount.
• Withholding obligation applies even if the employee is ultimately
exempt from Canadian tax under a Tax Treaty.
• Only exception is where a waiver is obtained authorizing no
withholding.
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Current State – Regulation 102 RULES
The current waiver process is done on an employee-byemployee basis:
• The R102 - J waiver is a joint employee/employer application used
when the employee’s total Canadian remuneration is less than
$10,000 for the US residents or $5,000 for residents of other treaty
countries.
• The R102 - R waiver is an employee only application used when the
employee is expected to earn more than $10,000 when a US resident
(or $5,000 when a resident of another treaty country), but the income
is exempt under other treaty conditions (i.e. remuneration not borne
by a PE the NR employer has in Canada).
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Current State – Enforcement of Rules
Employer Considerations:
• CRA is currently assessing Reg. 102 tax withholdings in all
situations were a waiver has not be obtained.
• The employer must prepare a T4 slip and T4 Summary to report the
Canadian source compensation and tax withheld at source.
• CRA requires the non-resident employer to register and open
payroll accounts.
• The employer is liable to pay the taxes that should have been
withheld from the NR employees, but wasn’t.
• Penalties of 10% (or 20% for certain situations) are being imposed
on tax amounts which the employer was required to withhold, plus
interest.
The negotiated deals or concessions with CRA that may have been allowed in the
past by different district offices, are no longer happening. The same enforcement of
the rules is now being applied consistently all across the country.
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Current State – Enforcement of Rules
Employee Considerations:
• The NR employee is required to obtain either a Canadian SIN or ITN
(Individual Tax Number) for reporting purposes (e.g. T4 slip).
• If the employee is treaty exempt but no waiver was filed, they must file
a NIL personal tax return to be refunded the Reg. 102 taxes paid.
• CRA is not allowing any withholding taxes be refunded back to the
Company directly. All refunds must be made in the name of the
employee. This can be a problem if the tax was originally funded by
the employer.
• The R102-R waiver can’t be filed retroactively. It must be submitted
at least 30 days prior to the employee beginning work in Canada. The
R102-J waiver can however be approved retroactively up to 60 days
prior to the date a complete waiver application is received.
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Future State – What Should NR
Companies be doing?
CRA is continuing its active audit activity on cross border
services so Companies should not ignore the Reg. 102
issue. Instead they should:
• Put policies and processes in place to track employees in Canada and
determine the Canadian source remuneration.
• Consider use of the voluntary disclosure program to get prior years into
compliance, before the problem is identified on audit.
− With a voluntary disclosure the penalties are generally waived
• Use the waiver process, but note that waivers for employees who were
non-compliant in prior years, won’t be approved.
• Realize that to qualify for the proposed “employer certification”
program, the employer will need to be compliant in the current year and
possibly prior years.
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Future State – What is CRA doing?
• The CRA recognizes the administrative burden faced by NR
employers and treaty exempt NR employees with the
reporting and withholding obligations.
• CRA is working on a more comprehensive policy to make it
easier for employers to comply, including:
– New Dec. 2012 administrative relief for NR employees in Canada on
conferences.
– Possible “employer certification” program which will permit NR
companies to become “certified” and therefore allow all NR
employees meeting certain conditions (e.g. days threshold - under 60
days) to be exempted from the Reg. 102 rules.
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Administrative Relief - Conferences
• Dec. 21, 2012 CRA issued administrative relief from
Reg.102 W/H taxes and reporting (e.g. T4s) for certain
people attending conferences in Canada.
• Relief applies only if there is an income tax treaty between
Canada and the employee’s country of residence.
• Conditions required:
i. The NR employee must be present in Canada for 10 days or less
(including travel time) to attend the conference.
ii. If the employee is a resident of the US, the employee must earn less
than $10,000 in the year from employment (including the amount
earned during the conference period), or $5,000 if the employee is
resident in another treaty country.
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Administrative Relief - Conferences
• If an employee is working in Canada immediately before or
after the conference, only the days (maximum of 10) spent
at the conference will be exempted.
• Employee still required to obtain a waiver of the W/H tax for
the work days spent before or after.
• The relief will not be allowed in circumstances the CRA
considers to be abusive. For example the relief will not
apply where an employee participates in numerous
conferences in a year.
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Administrative Relief - Conferences
What is a “ Conference”?
CRA has defined a conference to be a formal meeting attended
by a minimum of 30 participants for professional purposes. The
participants may work for the same employer or different
employers. The participants are not providing services for which
their employer is receiving a fee from another person. In
addition, the participants are not soliciting business on behalf of
their employer; providing services to a parent, subsidiary, or
partnership related to their employer; marketing their employer’s
services or products, or meeting with clients regarding their
employer’s business.
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Overseas Employment
Tax Credit Impact of
Phase-out
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OETC Phase-Out – What is it?
• The March 29, 2012 Federal Budget included an
unwelcome surprise of the phase-out and ultimate
elimination of the OETC.
• OETC = an individual’s tax payable on 80% of his/her
qualifying foreign income up to a maximum of $100,000
• In Alberta the maximum benefit of the OETC is $80,000 x
39% tax rate = $31,200
• The OETC is being phased-out through a reduction in the
percentage of qualifying income, eligible for the credit.
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OETC Phase-Out
• The Phase-out between 2012 – 2016 is as follows:
•
•
•
•
•
2012 - 80% of qualifying income up to $100,000
2013 - 60% of qualifying income up to $100,000
2014 - 40% of qualifying income up to $100,000
2015 - 20% of qualifying income up to $100,000
2016 – 0% of qualifying income up to $100,000
• Relief from the “Phase-out” is available where the employer
is committed to a particular project in writing before March
29, 2012.
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OETC Phase-Out – relief provisions
• Relief from the phase-out will be extended to situations
where an employer has submitted a written irrevocable
tender before the budget date, but the tender was only
accepted at a later date.
• If relief available, no phase-out in 2013-2015 (e.g. OETC
still based on 80% of $100,000 of qualifying income).
• OETC is still eliminated entirely in 2016.
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OETC Phase-Out – What to do now?
• Quantify the exposure as a result of the loss of the OETC
by:
– Identifying which contracts/projects your employees are working
on that will be grandfathered until 2015.
– How does the Company tax policy address the OETC
benefit….employee benefit, employer benefit or joint?
– Determine the extent to which the tax savings realized by the
employee from the OETC can be replaced by claiming FTCs.
– Determine which employees have been guaranteed a net pay or
the full benefit of the OETC in their contracts, throughout the
phase-out period and beyond.
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Tax Considerations of
Temporary Living Costs
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Temporary Living Costs - Canada
Normally employer paid housing, travel and meals costs are
taxable benefits to the employee for Canadian tax
purposes.
• An exemption from the taxable benefit rules, under Section
6(6) of the Income Tax Act applies for an employee where:
– Amounts paid or allowances received must be reasonable
– Employee must be working at a “special worksite” and performing
duties that are “temporary” in nature
– Employee maintains a self-contained domestic establishment as a
principal place of residence, at their main place of employment, that:
• is available for use by employee and not rented out; and
• by virtue of distance from site, employee could not be expected to
commute daily
•19 Employer
should
get
form from employee.
Hot Tax issues and Challenges
– Mobility
to and TD4
from Canada
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Temporary Living Costs - Canada
Common Issues Identified
• Assignment/duties not of a temporary nature (i.e. CRA
considers temporary not to exceed 2 years…but what
happens if it does?)
• Definition of a self contained domestic establishment
should include a residence where the employee either has
title to the property or has a formal legal lease agreement
in their name (living in a parents home does not meet the
test)
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Hot Tax issues and Challenges – Mobility to and from Canada
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Temporary Living Costs - US
• Employer paid housing, travel and meals/allowances are
taxable benefits to the employee for US tax purposes.
• Where employee is “temporarily” away from home, such
employer – paid expenses where the are part of an
“accountable plan” are not taxable.
– “Temporary” defined to mean a work period expected to be less than
12 months at the start of the assignment
– If the 12 months is exceeded than only those costs in month 13
become taxable
– Where an employee makes frequent short trips to another location
over a period of a couple of years, issue arises as to whether it should
be considered one continuous period
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Hot Tax issues and Challenges – Mobility to and from Canada
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Temporary Living Costs – Challenges
• Different tax treatment in different countries can result in
different payroll reporting and withholdings (e.g. Mexico
doesn’t have any exemptions at all so all housing costs for
example would be fully taxable from day 1).
• Tax protection or tax gross-ups may be necessary to keep
the employee whole.
• Some countries like the US post what the prescribed per
diems for food and lodging will be for most locations in the
US and some foreign countries. Exceeding these amounts
will result in taxable benefits arising.
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Stock Option Plans Issues and Challenges
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Stock Option Plans- Current Rules
• Pursuant to Section 7 of the Canadian Income Tax Act:
– The difference between the exercise price of the option
and the FMV of the share at date of exercise is treated as
employment income for T4 purposes (i.e. (“stock option
benefit”).
– The stock option benefit is generally subject to a 50%
personal tax deduction in Canada, so effectively only 50%
of the gross benefit is subject to tax. It is therefore taxed
at a similar rate to a capital gain.
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Hot Tax issues and Challenges – Mobility to and from Canada
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Stock Option Plans- Current Rules
Pursuant to Section 7 of the Canadian Income Tax Act
– To qualify for this 50% benefit, certain conditions must be
met:
i.
ii.
iii.
iv.
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There must be an agreement to issue shares/securities
Exercise price > FMV of shares at grant
Shares issued must be “prescribed shares”…a defined term!
The employee must be at arms length
Hot Tax issues and Challenges – Mobility to and from Canada
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Stock Option Plans- Common Issues
• Foreign based plans (particularly UK & US drafted plans)
often do not qualify for the 50% stock option deduction
because:
– No agreement to issue shares/securities actually exists.
Basically there is only an agreement if the employee can
force the Company to settle in newly issued or treasury
shares.
• If the compensation committee (e.g. Employer) reserves the right to
settle awards in shares or an equivalent amount in cash, or;
• The company can reduce the number of shares issuable to account
for the applicable withholding taxes (e.g. net settlement), then
The stock option plan is offside Section 7 of the ITA and the Plan will
not qualify for the stock option deduction. This means the employee
is taxable on 100% of the option benefit rather than just 50%.
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Hot Tax issues and Challenges – Mobility to and from Canada
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Stock Option Plan- Common Issues
Foreign and Canadian based plans often do not qualify for
the 50% stock option deduction because of the following
common provision:
• The Employer (Compensation committee) authorizes the
employee to satisfy the exercise of the exercise price of an
option through one of the following methods: (1) Cash; (2)
Broker assisted sale of shares; or (3) tender of previously
acquired shares to the company.
– In this scenario, the employee’s right to unilaterally
tender shares violates on of the “prescribed share
conditions” required to get the 50% deduction.
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Hot Tax issues and Challenges – Mobility to and from Canada
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Stock Option Plans- Common Fixes
To ensure the 50% deduction is available to your company’s
employees, the Company should:
i. Have the wording for all Plan Agreements and Award
Agreement reviewed to determine if the plan is offside the
Canadian rules……particularly stock option plans of foreign
based parent companies.
ii. Modify the agreements to put Plans back onside, or add a
Canadian addenda to the Plan
iii. Plan documents should apply to all employees taxable in
Canada on their employment income. (e.g. domestic employees,
expatriate employees, short term business travelers to Canada,
etc.)
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