Canada: Non-Resident Withholding Relief Changes

Further to the changes proposed in 2015, on January 12, 2016 the Canada Revenue Agency (CRA) released information on the process for providing 'qualifying non-resident employers' relief from the Canadian income tax withholding requirements on remuneration paid to 'qualifying non-resident employee' for services performed in Canada.

Background on the Non-Resident Withholding Relief Process

Under the Canadian Income Tax Regulations (Reg. 102), foreign employers are required to withhold and remit Canadian tax withholdings from Canadian source remuneration earned by non-resident employees.

If the employee and employer meet certain requirements, the CRA allows for an exemption from the tax withholdings through an individual withholding waiver application. Such application requires a good amount of support and explanation for the exemption from withholdings. CRA must approve the application before any adjustments to the prescribed tax withholdings can be made.

The current process can be burdensome and costly. The new developments provide certain administrative relief, but do not apply to all circumstances. A qualifying non-resident employer and qualifying non-resident employee must satisfy the following requirements to be covered by the new administrative relief process:

Qualifying Non-Resident Employer

• Resident of a country with which Canada has a tax treaty. If employer is a partnership, at least 90% of its income or loss for the fiscal period should be allocable to partners who are resident in a country with which Canada has a treaty.
• Employer should be certified by the Minister of National Revenue. The application for certification is made on Form RC473, as described below.

Qualifying Non-Resident Employee

• Resident of a treaty country;
• Is expected to be exempt from Canadian income tax under the treaty provisions; and
• Is not present in Canada for 90 or more days in any 12-month period or works in Canada for less than 45 days in the calendar year.

Application to Become a Qualifying Non-Resident Employer

The application is made on Form RC473 which should be completed by the employer and sent to the CRA for approval. Only basic employer information needs to be provided. Once approved, the employer will not be required to withhold and remit Canadian income tax from remuneration paid to qualifying non-resident employees for services performed in Canada.

Generally, the approved application will be valid for two calendar years after which Form RC473 should be resubmitted. The CRA has also provided a transition period and is expected to consider approvals retroactive to January 1, 2016 if Form RC473 is submitted by March 1, 2016.

The employer must ensure the following actions are taken for all qualifying employees once the application is approved:

• Track and record the number of days each qualifying non-resident employee is working or present in Canada and the income attributable to their Canadian work days;
• Determine if employees are resident in a country with which Canada has a treaty;
• Evaluate and determine whether the employees meet 'qualifying non-resident employee' criteria;
• Obtain a Canadian Business Number;
• File annual T4 slips and summary along with information returns for those employees who provide employment services in Canada, either if qualified for the withholding exemption or non-qualified (no T4 reporting is required if exempt qualifying non-resident employee's Canadian source income is under $10,000);
• Make its books and records available to the CRA for inspection as requested.

Reg. 102 Tax Waiver

The Reg. 102 tax withholding waiver remains in place. This waiver can still be used if an employee does not satisfy the requirement outlined above, but is still eligible for exemption from Canadian tax withholdings under the Income Tax Treaty provisions. Non-resident employers who do not want to participate in the certification program may continue filing individual tax waivers to comply with the Reg. 102 requirements.

Please contact Ernie Nagratha at anagratha@globaltaxnetwork.ca with any inquiries.

The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.

Author: Ernie Nagratha, Partner, Trowbridge Professional Corporation