Taxation of Non-Resident Employees in Canada
Non-resident employees are generally defined as a non-resident of Canada with workdays in Canada during the calendar year—Therefore they have a Canadian source employment income.
If they are employed by a non-Canadian entity, they generally remain on the non-Canadian payroll.
Withholding Canadian Income Tax for Non-resident employees
A non-resident employer is subject to the same withholding obligations as resident employers. Thus, non-resident employers must withhold and remit Canadian income taxes in connection with an employees’ Canadian source employment income.
They must file a T4 information return, and the amount of the withholding is referred to as a Reg. 102 withholding.
The employer is still obligated to withhold tax, even if the employee is ultimately exempt from Canadian income tax by virtue of a treaty.
Waivers on Treaty Exempt Income
The employee and employer can jointly apply for a waiver to authorize the employer not to withhold Canadian income taxes, if it’s applicable.
The employee is exempt from Canadian tax, based on a dollar threshold ($10,000 for US residents) or based on being present in Canada for less than 183 days in a calendar year.
If the waiver application is approved (Quebec requires a separate waiver application), CRA will issue a letter of authorization effective on the later of:
1. The starting date of services, provided by employee of Canada
2. 60 days before date on wavier application.
The employer must monitor the employee’s time spent in Canada to ensure the employee continues to be eligible for treaty exemption. A waiver does not release employer’s T4 reporting obligation.
Failure to register for a payroll account and produce the required T4s will jeopardize future waiver applications. CRA has recently increased its ability to identify situations where foreign employers are not in compliance with payroll reporting and withholdings.