Principal Issues: Does a U.S. resident employer have to withhold Canadian payroll deductions from salary or wages paid to a Canadian resident employee who renders services in Canada and the U.S.?
Position: Yes
Reasons: The employer must withhold because the employee is resident in Canada. However, the employee may be able to have withholdings reduced for the relevant foreign tax credit.
XXXXXXXXXX 2007-024208 S. E. Thomson July 18, 2007
Dear XXXXXXXXXX:
Re: Withholdings From Wages
This is in reply to your letter of June 6, 2007 to the London Tax Services Office. You are a company resident in the U.S., and would like to know if you have to get a payroll number and withhold payroll deductions from the wages that you pay to your employee, Mr. B. Mr. B. is a resident of Canada for tax purposes, and will render his services to you partially in Canada and partially in the U.S.
OUR COMMENTS
Under Canadian rules, an employer is required to deduct withholdings at source from the salary that it pays to an employee who is a resident of Canada, regardless of where the services are rendered. Paragraph 153(1)(a) of the Income Tax Act (the "Act") requires that "every person" paying salary, wages or other remuneration shall withhold from the payment the amount determined in accordance with prescribed rules, and remit that amount to the Receiver General at the prescribed time. It does not matter that the employer is not resident in Canada. For more information regarding your obligations as an employer, please refer to the information on our website at http://www.cra-arc.gc.ca/payroll.
Residents of Canada are taxable in Canada on their worldwide income. Article XV of the Canada-U.S. Income Tax Convention (the "Treaty") provides that Canada has the right to tax its residents on their employment income. It also provides that in some cases the U.S. may also tax the employment income paid to the employee where the employee has exercised employment in the U.S. Where the U.S. has taxed in accordance with the Treaty, the employee will be entitled to a foreign tax credit for taxes paid to the U.S. on his employment income. For more information, see our Interpretation Bulletin IT-270R3 Foreign Tax Credit available on our website. In particular, paragraph 25 of IT-270R3 discusses the location of an individual's employment. Mr. B. may be able to obtain a "letter of authority" from the Canada Revenue Agency to authorize you to reduce the deductions at source to take into account the foreign tax credit. For information regarding the letter of authority, please refer to Chapter 6 of the Guide T4001 Employer's Guide - Payroll Deductions and Remittances on our website.
We trust that we have been of assistance.
Yours truly,
Olli Laurikainen, C.A., Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch