Principal Issues: [TaxInterpretations translation] 1. An employee who is a non-resident of Canada performs the duties of the employee’s employment outside Canada. Does the employee’s Canadian employer have to deduct federal income tax at source?
2. Is the employment insurable for EI purposes?
Position: 1. There would likely be an exemption from withholding on the employee's remuneration if the non-resident employee does not perform any of the employee’s duties in Canada. In addition, the obligation to withhold an amount by virtue of subsection 105(1) of the Regulations would not apply.
2. If the employment is outside Canada and the employee is a non-resident of Canada, the employment would not be insurable employment.
Reasons: 1. Subject to certain specific situations, subsection 104(2) of the Regulations provides an exemption where the employer pays remuneration to an employee who was not employed in Canada and was not resident in Canada. Subsection 105(1) of the Regulations does not apply to payments referred to in the definition of "remuneration" in subsection 100(1) of the Regulations that include salary or wages to an officer or employee.
2. Section 5 of the Employment Insurance Regulations.
XXXXXXXXXX 2007-024563 Sylvie Labarre, CA November 14, 2007
Dear Sir,
Subject: Remuneration of a person not resident in Canada
This is in response to your letter of July 16, 2007, requesting our opinion regarding source deductions on remuneration paid to a non-resident of Canada for employment outside Canada and regarding employer contributions related to that remuneration.
Facts
An employee of a Canadian corporation who is a French national has moved to France. He has applied to the Canada Revenue Agency (CRA) for acknowledgement of his residency status. The CRA has responded to the employee that it will consider him a non-resident of Canada commencing July 29, 2007.
The employee was employed by the Canadian corporation since August 1998 and resided in Canada from that date until the date of the employee’s departure. He had a temporary employment permit and was considered a resident of Canada for the purposes of the Income Tax Act (the "Act").
XXXXXXXXXX
The Canadian corporation does not have an establishment in France. However, it must register with the responsible French organizations and pay employer's contributions in France so that the employee can benefit for French social security purposes.
Questions
1. Can the corporation cease deducting tax at source for the employee?
2. Can the corporation cease paying employer's charges in Canada once the employee leaves Canada and becomes a resident of France?
3. Does the corporation have to issue a Record of Employment for the employee?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, it is the practice of the Canada Revenue Agency (CRA) not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
By virtue of paragraph 2(3)(a), where a non-resident was, at any time in a taxation year or a preceding year, employed in Canada, income tax must be paid on the non-resident's taxable income earned in Canada, as determined in accordance with Division D of the Act.
Pursuant to section 115, the taxable income earned in Canada for a taxation year of a person who at no time in the year is resident in Canada includes incomes from the duties of offices and employments performed in Canada.
However, subsection 115(2) (which is part of Division D of the Act) could deem the non-resident person to be employed in Canada during the year and could add a certain amount to the employee’s taxable income earned in Canada. For example, paragraph 115(2)(c) of the Act provides that an individual
(i) who had, in any previous year, ceased to be resident in Canada,
(ii) who received, in the taxation year, salary or wages or other remuneration in respect of an office or employment that was paid to the individual directly or indirectly by a person resident in Canada, and
(iii) who was, under an agreement or a convention with one or more countries that has the force of law in Canada, entitled to an exemption from an income tax otherwise payable in any of those countries in respect of the salary or wages or other remuneration, …
is deemed, for the purposes of subsection 2(3), to have been employed in Canada in the year.
You informed us that the employee, resident in France, will be taxed on the employee’s salary in France. Consequently, if that is the case and subject to a review of all the relevant facts, subsection 115(2) will not apply as condition (iii) is not satisfied.
Generally, the employment is carried out at the place where the employee was physically located at the time the activities for which the employment income is earned are carried out, even if the results of the work are exploited in Canada.
Thus, remuneration reasonably attributable to duties of an office or employment performed outside Canada by a non-resident that is subject to income tax by the government of a country other than Canada would not be subject to Canadian tax.
Subsection 104(2) of the Income Tax Regulations (the Regulations) exempts an employer from withholding federal income tax normally required to be withheld from a payment of remuneration in accordance with section 102 or section 103 of the Regulations where the employer pays remuneration to an employee who was not employed in Canada and was not resident in Canada at the time of the payment except in certain situations including where the remuneration is reasonably attributable to the duties of an office or employment performed or to be performed in Canada by a non-resident person.
Subsection 105(1) of the Regulations provides for a 15% withholding tax where a person pays a fee, commission or other amount to a non-resident person in respect of services rendered in Canada of any nature whatever. However, that subsection of the Regulations does not apply to payments referred to in the definition of "remuneration" in subsection 100(1) of the Regulations which include salary or wages to an agent or employee.
Consequently, on the facts of the employee’s case, if the non-resident person does not perform any of the employee’s employment duties in Canada, there would be no withholding tax with respect to the federal tax.
In response to your question as to whether you can cease paying employer's charges in Canada as soon as the employee leaves Canada and becomes a French resident, we must first point out that, with respect to the payment of pension plan contributions, we have assumed that, since the corporation is established in Quebec, it is the Quebec Pension Plan that applies and not the Canada Pension Plan. Consequently, you should address that aspect of your question to the Ministère du Revenu du Québec, which has jurisdiction in that matter.
As to whether, in the situation you described where an employee is performing the duties of the employee’s employment outside Canada, you may cease to pay and deduct EI premiums, we refer you to section 5 of the Employment Insurance Regulations (EIR). The employee’s section reads as follows:
5 Employment outside Canada, other than employment on a ship described in section 4, is included in insurable employment if
(a) the person so employed ordinarily resides in Canada;
(b) that employment is outside Canada or partly outside Canada by an employer who is resident or has a place of business in Canada;
(c) the employment would be insurable employment if it were in Canada; and
(d) the employment is not insurable employment under the laws of the country in which it takes place.
It is important to remember that all the requirements listed above must be satisfied in order for an overseas job to be included in insurable employment.
In this regard, according to the information you sent us regarding the employee's residency status, it appears that following a request from the worker to establish the employee’s residency status, the Canada Revenue Agency determined that the worker was considered a non-resident of Canada commencing July 29, 2007. As a result, since that date, the worker could no longer be considered ordinarily resident in Canada within the meaning of the Regulations. In this case, it is clear that paragraph 5(a) of the EAR was no longer satisfied as of July 29, 2007, and, consequently, the worker's employment outside Canada was not insurable. As a result, the worker was no longer required to pay EI premiums for that employment in Canada as of that date.
Notwithstanding the above, we wish to bring to your attention that it would be preferable for you to make a formal request for a determination of the employment status of the worker in question to the Tax Services Office serving you. This is because this information is provided to you on an informal basis only and does not give you any right of appeal in the event of a contrary opinion.
You should also direct your questions about your contribution to the RAMQ and about Quebec income tax withholding to the Ministère du Revenu du Québec, which has jurisdiction in that matter. You should also submit your third question regarding the filing of the Record of Employment to the Department of Human Resources and Social Development Canada.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.