John Demetri joined Baker Tilly WM LLP in August 2018 as a Senior Manager in the Tax Group. John specializes in providing cross-border tax planning and tax compliance service to both individuals and businesses doing business in Canada and the U.S.
Changes in technology and, most importantly, the Covid-19 pandemic have taught us all that remote working is a viable option. And that it provides advantages to employers as an added perk when attracting and/or maintaining top talent. Many employers are choosing to offer remote work options and employees are embracing this benefit.
In this article we will highlight considerations and issues from a tax perspective to employers that decide to have employees work for them remotely whether out of province or out of country.
Canadian employers with out of province remote employees
Per the withholding tax rules, an employer is required to determine an employee’s province or territory of employment to make proper payroll deductions and remittances. For purposes of withholding for income tax, Canada Pension Plan, and Employment Insurance the rules depend on whether your employee physically reports for work at your establishment or place of business. An establishment of an employee is any place or premises in Canada owned, leased, or rented by the employer. Note, it does not have to be a permanent location.
Where an employee does not report to their employer’s establishment, such as when they work from home, the view is that the employee’s province of employment is where their salary and wages are paid. Normally, this is where the employer's payroll department is located.
For example, if an employee works remotely from the Province of Alberta for an employer that only has an establishment in British Columbia, this would mean that payroll withholdings would be administered using British Columbia payroll rates. This may present a challenge to the employee whereby not enough or too much withholding taxes may be taken from them, which would not be reconciled until the employee files their annual T1 General Income Tax Return.
Depending on the provinces involved, the location of an employee’s employment may add additional unexpected costs. Including other taxes such as employer health tax contributions even though an employee does not reside in the employer’s jurisdiction.
Foreign Employers hiring Canadian resident remote employees
The requirement to deduct taxes is primarily based on the location from where an employee is deriving their income unless otherwise stated by the laws of the country or the tax treaties between countries. For example, if an employee is resident in Canada and is employed by a US-based employer, the employee is earning income in Canada thus the US employer is required to deduct and remit payroll taxes in Canada. This would include the US employer applying for a Canadian Business Number, opening a payroll account, and ensuring appropriate tax slips such as the T4 Statement of Employer Remuneration Paid are timely filed.
Generally, if a foreign employer does not have a place of business in Canada nor an establishment in Canada, payroll deductions are done using the “beyond the limits of any province/territory or outside Canada” tax rates. Similar to having a remote employee working in a province that is different from where the employer has their establishment, this can cause over and under remittance of withholding taxes for the employee.
A concern for foreign employers hiring employees in Canada is the potential situations that may result where a foreign employer is considered “carrying on business” in Canada. This opens a business up to Canadian corporate tax filing obligations and a potential for profits of the foreign entity being considered taxable in Canada. A full review of business presence in Canada would be required to determine whether a foreign business would be considered taxable in Canada and whether an Income Tax Treaty between Canada and the foreign jurisdiction can provide relief.
Canadian employers hiring foreign remote employees
Similarly, Canadian employers who hire foreign remote employees need to review the requirements in the foreign country where their employee is remotely working. For example, a Canadian employer with employees working in the US is required to withhold US federal, Social Security, Medicare and, where applicable, state income tax and other taxes such as state disability taxes. In addition, the employer will likely have to apply for business and payroll account numbers. Depending on jurisdiction and if specified criteria are met, they may have to file corporate tax returns in the foreign jurisdiction and be considered taxable.
The pandemic and a tightening labour market have made employers rethink their approach to remote work arrangements and have shown that remote work is possible and in many cases necessary to attract or retain top talent. Before hiring remote employees outside an employer’s jurisdiction, a review of the tax implications to both the employee and employer involved should take place. Our article provides a high-level overview of the considerations from a tax perspective, a full review with a tax professional is necessary to be able to determine all tax implications based on each employer/employees’ specific details. Further to this, legal and other issues should be reviewed prior to agreeing to these forms of arrangements.
Out of province or country employees also have different implications when it comes to employer sponsored group benefits plans. Learn how to provide coverage for employees considered expatriate, inpatriate or 3rd country nationals at our Travel Insurance webinar at CPHR on August 4th.
CPHR Webinar: Protecting Employees Who Travel
Learn about travel insurance options, exclusions and coverage.