Employer withholding obligations
Income that a non-resident earns in Canada from an office or employment is generally taxable in Canada. However, a non-resident who is a resident of a country that has a tax treaty with Canada is likely to be exempt from Canadian taxation on the salary, wages, and other remuneration (employment income) he or she earns in Canada from a non-resident employer if certain conditions are met. For example, a United States resident employee will generally be exempt from Canadian taxation if the employee is present in Canada for no more than 183 days in any 12-month period starting or ending in the relevant calendar year and his or her employer has no permanent establishment in Canada.
Non-resident employees providing employment services in Canada are subject to the same withholding, remitting, and reporting obligations as Canadian resident employees. Therefore, any employer, including a non-resident employer, is required to withhold amounts on account of the income tax liability of an employee in Canada even if the employee is likely to be exempt from tax in Canada because of a tax treaty. For the employer to be relieved of their obligation to withhold, the employee would have to apply for and get an income tax waiver from the Canada Revenue Agency (CRA).
However, there is an exception to the employer’s withholding obligation for certain non-resident employers paying employment income to non-resident employees for performing the duties of an office or employment in Canada after 2015. These non-resident employers, who apply for non-resident employer certification, will not have to withhold and remit tax on the payments they make to non-resident employees who are working in Canada for a limited time and are exempt from tax in Canada under a tax treaty.
Qualifying for non-resident certification
What is a qualifying non-resident employer?
In the case of an employer that is not a partnership:
- A qualifying non-resident employer at any time means an employer that is at the time of the payment
- certified by the Minister of National Revenue under subsection 153(7) of the Income Tax Act and is either
- resident in a country that Canada has a tax treaty with, or
- would be considered resident in a country that Canada has a tax treaty with, if that country treated the employer as a corporation for tax purposes (e.g., a limited liability company formed in the U.S. that has not elected to be treated as a corporation for U.S. tax purposes).
- certified by the Minister of National Revenue under subsection 153(7) of the Income Tax Act and is either
In the case of an employer that is a partnership:
- A qualifying non-resident employer at any time means an employer that is at the time of the payment a partnership where at least 90% of the partnership’s income or loss for the fiscal period that includes the time of the payment is allocated to members that are resident in a country that Canada has a tax treaty with. If the income of the partnership is nil for the fiscal period, the income for the period is deemed to be $1,000,000 for the purpose of determining a member’s share of the partnership income.
How do you become a qualifying non-resident employer in Canada?
If you want to become a qualifying non-resident employer, you have to fill out Form RC473, Application for Non-Resident Employer Certification, and send it to the CRA for approval. Applications should be received at least 30 days before a qualifying non-resident employee starts providing services in Canada. If you meet the definition of a qualifying non-resident employer and agree to meet the CRA‘s conditions for certification, the CRA will send you an approval letter. The letter will certify that you are a qualifying non-resident employer and you do not have to withhold tax on the employment income you pay to qualifying non-resident employees during the period of your certification.
Since non-resident employer certification applies only to payments made to qualifying non-resident employees, you must withhold and remit tax on the employment income you pay to non-resident employees who are not qualifying non-resident employees, unless the employee applies for and gets an income tax waiver from the CRA.
Non-resident employees who are not qualifying non-resident employees or whose employer does not become certified can still apply to the CRA for an income tax waiver using Form R102-R, Regulation 102 Waiver Application.
What is a qualifying non-resident employee?
A qualifying non-resident employee, at any time in respect of a payment of employment income, is an employee that:
- is resident in a country that Canada has a tax treaty with at the time of the payment;
- does not have to pay tax in Canada on the payment because of a tax treaty;* and
- works in Canada for less than 45 days in the calendar year that includes the time of the payment or is present in Canada less than 90 days in any 12-month period that includes the time of the payment.
* A qualifying non-resident employer must refer to the tax treaty between Canada and the employee’s country of residence to see if there is a tax exemption in place and the criteria that have to be met for it to apply.
What is the difference between days worked in Canada and days of presence in Canada?
Days worked in Canada include only the days during which the employee is physically present in Canada and paid by his or her employer for the time spent in Canada, which generally excludes weekends, days off, and holidays. Days of presence in Canada includes any day during which the employee is present in Canada, even if the employee is only present for a portion of the day.
The following is an example that illustrates the use of days worked and days of presence in Canada for the purpose of determining a non-resident employee’s qualifying status:
- U.S. employer certified as qualifying non-resident employer (QNRER) for 2016, 2017,
- QNRER will be sending their employee to work in Canada from June 5, 2016 to June 18, 2016. The employee will be spending their entire time in Canada (14 days of presence) and will be paid for 10 working days during that time,
- The employee is a resident of the U.S. and is expected to be exempt from tax in Canada pursuant to Article XV of the Canada – U.S. Treaty.
Since the non-resident employee will be paid for only 10 working days in Canada for 2016 they meet the less than 45 working days in a calendar year condition so they are considered a qualifying non-resident employee and the QNRER will not be required to withhold tax from the employee’s remuneration for the services provided in Canada during 2016.
- The same employee is also being sent to work in Canada from March 4, 2017 to May 17, 2017,
- Employee will be spending their entire time in Canada (75 days of presence) and will be paid for 54 working days during that time,
- The employee has no other days of presence in Canada for 2017.
Since the non-resident employee will be paid for 54 working days in Canada for 2017 they will not meet the less than 45 working days in a calendar year condition. However, they may still qualify under the days of presence condition for 2017. The employee’s days of presence during the 12 month period from May 18, 2016 to May 17, 2017 are 89 days (14 + 75). As a result, they meet the less than 90 days in any 12 month period that includes the time of the payment condition and therefore the QNRER is not required to withhold tax from the employee’s remuneration for the services provided in Canada during 2017.
Who can be a certified non-resident employer?
Non-resident employer certification removes the requirement for non-resident employers to withhold and remit tax when they pay employment income to qualifying non-resident employees. This means there would be no need for qualifying non-resident employees to request waivers of withholding from the CRA. The non-resident employer certification period will be valid for up to two calendar years and will apply to payments made after 2015.
What conditions do you have to meet to become a qualifying non-resident employer?
You can be certified as a qualifying non-resident employer if the CRA is satisfied that you are resident in a country that Canada has a tax treaty with and you agree to the following CRA conditions:
- You will evaluate and document how your employee meets the definition of a qualifying non-resident employee at the time you pay any employment income. To achieve this, you have to do all of the following:
- make sure your employee meets the definition of a qualifying non-resident employee on an ongoing basis
- get documents to support your employee’s country of residence (e.g., passport or a signed copy of CRA Form NR301, Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person. Ensure employee specifies “employment income” in Part 7 of Form NR301.
- show how your employee is expected to be exempt from tax in Canada because of a tax treaty
- You will track and document on an ongoing basis the number of days your qualifying non-resident employee is working in Canada or is present in Canada and the employment income that corresponds to these days. For more information, see “What is the difference between days worked in Canada and days of presence in Canada?”
- You will get a business number. If you are expected to make remittances, you should also register for a program account number for payroll purposes. You can use Form RC1, Request for a Business Number, to get a business number if you do not already have one.
- You will prepare and file a T4 slip and a T4 Summary for your non-resident employee who has provided employment services in Canada that are not excluded from reporting under proposed subsection 200(1.1) of the Income Tax Regulations. For more information, see “Does a qualifying non-resident employer have to file a T4 slip and T4 Summary for tax exempt payments made to a qualifying non-resident employee?” and Guide RC4120, Employers’ Guide – Filing the T4 Slip and Summary.
- You will complete and file Canadian income tax returns as required by the Income Tax Act for those calendar years covered by the certification period. For example, if you are a corporation carrying on business in Canada, you have to file a corporate income tax return along with schedules T2SCH91, Information Concerning Claims for Treaty-Based Exemptions, and T2SCH97, Additional Information on Non-Resident Corporations in Canada.
- You will make your books and records available in Canada for the CRA to inspect when it asks so it can verify that you are meeting the conditions of your employer certification agreement and the withholding requirements of the Income Tax Act and the Income Tax Regulations.
How and where to apply for non-resident certification
To become certified as a qualifying non-resident employer, send a completed Form RC473, Application for Non-Resident Employer Certification, to the Vancouver Tax Services Office – International Waivers. If you are sending employees to work in Canada under a contract you have entered into to provide services in Canada and will be applying for a regulation 105 waiver, please submit both the form and the waiver to the Vancouver Tax Services Office. The complete address is:
Regular mail
Canada Revenue Agency – International Waivers
Post Office Box, 470 Station Main
Surrey BC V3T 5B7
Certified/registered mail
Pacific International Waivers Centre of Expertise
c/o International Waiver Program – Section 445-15
Vancouver Tax Services Office
9755 King George Boulevard
Surrey BC V3T 5E1
After you become a certified non-resident employer
Does non-resident employer certification affect Canada Pension Plan contributions and employment insurance premiums?
Although as a qualifying non-resident employer you do not have to withhold income tax on the employment income you pay to qualifying non-resident employees during your period of certification, you may still have to withhold Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums. However, there may be exceptions to this. An exemption of CPP may be available based on a reciprocal social security agreement between Canada and your employee’s home country. These agreements make sure only one plan covers an employee—the Canada Pension Plan or a foreign social security plan.
An exemption for EI may also be available if the unemployment insurance laws of your employee’s home country require premiums to be paid on the same employment income. If you do not withhold and remit these amounts as required without the CRA‘s authorization, you may be held liable for the whole amount plus interest and penalties. For more information, see Guide T4001, Employers’ Guide – Payroll Deductions and Remittances.
Does a qualifying non-resident employer have to file a T4 slip and T4 Summary for tax exempt payments made to a qualifying non-resident employee?
Generally speaking, a qualifying non-resident employer who has made tax exempt payments to a qualifying non-resident employee is required to file a T4 slip and a T4 Summary for that employee who has provided services in Canada. However, if after reasonable enquiry, the qualifying non-resident employer has no reason to believe that the qualifying non-resident employee’s total taxable income earned in Canada (which includes any amounts exempted from income tax in Canada pursuant to an income tax treaty) in the calendar year during which the salary was paid is more than CAN $10,000, the qualifying non-resident employer does not have to file a T4 slip and a T4 Summary for that employee.
Example:
- ABC Inc., a qualifying non-resident employer resident in the U.S. sends Sean, a qualifying non-resident employee to work in Canada in 2016 and will be paid for 20 working days,
- Sean, a U.S. resident, is paid the equivalent of CAN $8,900 and has no other taxable income earned in Canada in 2016,
- Sean is exempt from CPP and EI in Canada.
In this case, after reasonable enquiry, Sean’s employer has determined that his taxable income earned in Canada for 2016 is not more than CAN $10,000 therefore they are not required to file a T4 slip and T4 Summary for the employment income earned in Canada.
When your employee is no longer a qualifying non-resident employee
If after reasonable enquiry you find that your employee no longer meets the definition of a qualifying non-resident employee, you should immediately write to the CRA‘s Vancouver Tax Services Office – International Waivers. The letter should disclose in full your employee’s circumstances, including why he or she no longer qualifies. If your employee is still treaty-exempt, you should send the CRA a completed Form R102-R, Regulation 102 Waiver Application.
If, after reviewing the circumstances, your employee is found to be treaty-exempt, the CRA will grant him or her a waiver of withholding for the rest of the employment income to be paid. In addition, as long as the CRA is satisfied that you took prudent measures to proactively monitor and confirm your employee’s ongoing status, it may waive any required tax withholdings retroactively for that employee. You will have to prepare and file a T4 slip and a T4 Summary for your employee reporting all amounts you paid while he or she was not qualified.
However, if your employee is not found to be treaty-exempt, you are expected to start withholding right away on any payments of employment income and to make arrangements to provide tax withholdings on any employment income already paid to him or her. A penalty for failing to deduct or withhold for the previous payments would not apply as long as the CRA is satisfied that you took prudent measures to proactively monitor and confirm your employee’s ongoing status and notified the CRA right away. You will have to prepare and file a T4 slip and a T4 Summary for your employee reporting all amounts you paid while he or she was not qualified.
If you do not notify the CRA and fully disclose when your employee no longer meets the definition of a qualifying non-resident employee, you may be assessed tax, interest, and penalty on all payments of employment income you made to that employee. The CRA could also revoke your certification.
Consequences of non-compliance
Penalty for failing to deduct or withhold
Generally any employer is liable to a penalty if, in a calendar year, they failed to deduct or withhold an amount from a payment of employment income they made to a non-resident employee for employment services performed in Canada.
However, this penalty will not apply when as a qualifying non-resident employer you made payments of employment income to a qualifying non-resident employee if, after reasonable enquiry, you had no reason to believe at the time of the payment that your employee was not a qualifying non-resident employee. Although reasonable enquiry is not defined in the Income Tax Act, you must take prudent measures to proactively monitor and confirm that your employee is a qualifying non-resident employee.
Can your compliance history affect your certification?
The CRA will not consider your compliance history with your withholding, remitting, and reporting obligations when it reviews your initial application to become certified as a qualifying non-resident employer. However, becoming certified as a qualifying non-resident employer does not cancel any liability you may have related to any prior withholding, remitting, and reporting obligations. If you had prior compliance deficiencies with your obligations, you may want to contact the Voluntary Disclosures Program.
Revocation of certification
The CRA can revoke your certification if you do not meet the conditions of your employer certification agreement or if the facts you presented when you applied for employer certification were false. If it revokes your certification, the CRA will send you a revocation letter. Note that you may become liable to withhold and remit tax to the CRA and be subject to any related penalties and interest for the entire period you were certified for.
Forms and publications
- RC473, Application for Non-Resident Employer Certification