TAX NEWS - 2010

Canada Tax: New waiver procedures related to employer withholding

The Canada Revenue Agency (CRA) recently announced revised procedures for obtaining waivers for withholding at source for nonresident employees who will be exempt from tax in Canada under a tax treaty.

Under the Canadian Income Tax Act, employers are required to withhold income tax at source in respect of their nonresident employees' Canadian-source compensation related to services rendered in Canada. The amount of the withholding is determined in accordance with section 102 of the Income Tax Regulations (commonly referred to as "Reg 102" withholding). The employer may be relieved of this withholding obligation only where a formal waiver is obtained from the CRA and, if services were rendered in the province of Quebec, the Minister of Revenue of Quebec. Waivers may be obtained for a number of reasons, including where the employment income of the nonresident employee would be exempt from Canadian taxation under a tax treaty.

The revised procedures are intended to facilitate employer compliance in connection with employees who are required to travel to Canada on short notice by allowing more time to provide information to the Canada Revenue Agency (CRA).


New rules for Reg 102 waivers

Canada Revenue Agency (CRA) will now permit the waiver application to be made jointly by the nonresident employee and the employer by completing Form R102-J, Regulation 102 Waiver Application – Joint Employer / Employee. Form R102-J is to be used when it is not practical to apply for a waiver or the required Individual Tax Number (ITN) before the start of services due to the nature of the services performed, such as equipment servicing (as needed), consulting and services for which the dates and names of employees coming to Canada cannot be determined until the last minute.

Form R102-J may be used only when an employee is:

- Resident in the U.S. and expected to earn less than CAD 10,000 in the year (and therefore exempt under paragraph 2(a) of article XV of the Canada-U.S. treaty); or
- Resident in another tax treaty country and expected to earn less than CAD 5,000 in the year.

Form R102-J should be completed and submitted as soon as it is known that a nonresident employee will be temporarily working in Canada. Form R102-J will provide the following information:

- Employee name, address and country of residence;
- Information on the services being provided in Canada; and

- Employee authorization allowing the employer to act on his/her behalf regarding the waiver and ITN applications and for the CRA to provide the ITN to the employer.

If the waiver application is approved, the CRA will issue a letter to the employer and nonresident employee authorizing the employer not to withhold tax on payments made to the employee. The authorization will be effective on the later of:

- The start date of the services provided by the employee in Canada that year; or
- 60 days before the date a complete waiver application (i.e. complete except for the ITN portion) has been received by the CRA.

For waiver applications received on or before 15 June 2010, the CRA, at its discretion, may issue the letter effective as of an earlier date in the calendar year.


Issues to consider

An employer is expected to have a process in place to track, record and report employment income attributable to the employees' work in Canada.

If the employer fails to provide ITNs for 90% of all employees for whom Form R102-J waivers were granted, for future requests, the CRA will require ITNs (or Social Insurance Numbers, if applicable) at the time of the waiver application.

In some cases, an employee's work in Canada may be extended, causing the employee's Canadian-source compensation to exceed CAD 10,000 in the case of a U.S. resident and CAD 5,000 for a resident of another treaty country. Furthermore, an employee may return to work in Canada at a later date not covered by the initial waiver application. In both cases, a new waiver must be applied for, which will be effective as from the date of its approval. The change in circumstances will not taint the initial waiver as long as the information provided at the time of the waiver application was complete and accurate.

However, in the first case, remittances will be required from the date of the change in circumstances. If there is a misrepresentation of information, remittances will be required for the full period the employee worked in Canada.

If an employer is audited for noncompliance with respect to its Reg 102 withholding obligations, relief may be granted where the employer can demonstrate that it was in the process of applying for a waiver.

The new process does not provide relief with respect to the employer's reporting obligations. The employer is required to issue a T4 slip to report the nonresident employee's wages earned in Canada.


Comments

These changes should make it easier for employers to comply with their Canadian withholding obligations because, previously, the waiver application had to be made by the individual employee and the waiver had to be in place before the services were rendered in Canada. Retroactive waivers were not granted. As a result, it was often not practical to apply for a waiver, particularly where the nonresident employee was required to work temporarily in Canada on short notice.

Employers will require certain information from employees to make use of the joint waiver application. Employers should educate their nonresident employees about the requirement to apply for an ITN and the importance of obtaining a waiver from withholding.