Changes in technology and, most importantly, the COVID-19 pandemic have taught us all that hiring remote employees in other provinces 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 for 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:
As of January 2024, the Canada Revenue Agency (CRA) has updated its administrative policy concerning remote work arrangements. The updated policy aims to establish the province of employment for CPP/QPP, EI, QPIP, and income tax deduction purposes.
According to the new policy, an employee is deemed to be reporting for work at the employer's establishment if, in the case of a full-time remote work arrangement, it is reasonable to consider the employee as "attached to an establishment of the employer."
Province of employment
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.
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:
For foreign employers hiring Canadian remote employees, tax obligations are contingent upon the employee's income source location. This means that even if the employer is based outside Canada, they are required to deduct and remit payroll taxes in Canada if the employee earns income within the country. This entails obtaining a Canadian Business Number, setting up a payroll account, and ensuring timely filing of tax documents like the T4 Statement of Employer Remuneration Paid.
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.
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, and offer US benefits. 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.
Overall considerations:
The 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.
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