By: Julie Hélène Tremblay, LL.B., M. Fisc., Senior Manager, Tax
Michel Babeu, CPA, CA, M. Fisc., Partner, Tax
A foreign company is actively seeking to expand into Canada. After numerous business development efforts and long negotiation sessions, the finish line is near: the first contract has been concluded. The company hurries to sign and move forward with the delivery process. However, there is a risk: the Canadian tax obligations the company will have.
In general, when a foreign company sells a good to a buyer for use in Canada, it does not have any tax obligations. The company does not operate in Canada; it does not have a permanent establishment in Canada; and, depending on the terms of the agreement, it is not necessarily the importer. But when the good delivered by the company includes installation or set up services, the situation is completely different.
The question of customs and value added taxes also arises. Even more important, you definitely need to clarify your obligations as an employer regarding employees deployed in Canada. This article address employer obligations.
What are your obligations as a foreign employer deploying employees in Canada?
As a foreign employer, you have a number of obligations regarding your employees. When they are deployed in Canada, even if they are not Canadian residents or their trip is very short, there are Canadian obligations. The employees in question may also have personal tax obligations. The foreign employer's obligations are as follows:
- Obtain a Federal business number;
- Obtain an ID number for Québec;
- Confirm if a work permit granted by Citizenship and Immigration Canada must be obtained for employees with regard to their activities in Canada;
- Employees deployed in Canada must request an individual tax number for the foreign employer to be able to submit withholdings to the tax authorities;
- The formalities must be taken care of by the organization of the foreign employer's country in order to benefit from the terms of the social security agreement between the foreign country and Canada and Québec so that the foreign employer is not expected to:
- Pay employer contributions to the Health Service Fund (HSF), Retraite Québec or to the Canada Pension Plan (CPP);
- Withhold employee contributions to Retraite Québec and CPP;
- Pay a contribution in Québec related to the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CSSNT) for industrial accidents and occupational diseases.
The Employment Insurance Regulations state that employment is not insurable when it is “employment in Canada of an employee [of a foreign employer] who resides [in another country], if premiums are payable in respect of services performed by the person in Canada under the unemployment insurance laws of that other country.” It is therefore important to compare the employment insurance program of the foreign country to determine if this exception applies.
As such, if you satisfy the formalities, you will not be expected to make employer contributions to Canada or Québec on the salaries of your foreign employees deployed in Canada. It is also important to consider employee obligations so their deployment remains a monetarily neutral experience for them. If there needs to be withholding, or if an exception may apply, it is important not to overlook anything.
Payroll withholdings for foreign employees
The question of imposition of Canadian and Québec taxes (and consequent tax withholdings) on compensation paid to your non-Canadian resident employees deployed in Canada is complex. In fact, an exception may apply to withholding and Canadian tax may need to be paid. This question must be resolved in light of Canadian legal provisions and the tax treaty between the employer's country of residence and Canada.
In any event, the employer needs to select the best options based on initial plans, adjust its positions then pay contributions and take withholdings from the salaries of employees deployed in Canada in compliance with the options selected. The amounts withheld from an employee's salary during a month are typically required to be remitted to the tax authorities no later than the 15th day of the following month. Failing to do so triggers a penalty based on a percentage of the amount that should have been withheld, regardless of the reason for the omission and the tax amount ultimately payable by the employee.
Customer payments to a foreign employer for services rendered
When a payment is made to a non-resident of Canada for services rendered in Canada, the basic rule is that withholdings under section 105 of the Income Tax Regulations and its Québec equivalent must be taken by the customer paying for these Canadian services. Combined, federal and Québec withholdings total 24%. An exemption may be obtained in certain situations. Lacking an exemption, or when in doubt, the Canadian payer is better to take the withholdings to avoid having a penalty and interest applied.
The willingness to conclude and carry out a contract to deliver goods and provide services in Canada could be bad counsel. When services are rendered, it is important to determine and meet your tax obligations. You could choose not to do it because you lack information or do not care about the risks, and it may be possible to avoid tax audits. But this is not a winning gamble, and there are severe financial consequences for such negligence, including paying the amounts that should have been withheld from employee salaries, penalties on the amounts and applicable interest. As professionals, we can help you through the maze and establish sound commercial links in Canada.
Find out more: Caution: Tax risks ahead!
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About Richter: Founded in Montréal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook and Twitter, @RichterCanada.