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 only in 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.
Joshua Drake Senior Programs Officer, Policy & Legislative Research Taxpayer Services & Debt Management 2010-038356 25 McArthur Road, Room 968 Place Vanier, Tower C Angelina Argento Ottawa, On K1A 0L5
November 3, 2010
Dear Mr. Drake:
Re: Withholdings from Wages
This is in reply to your email of October 13, 2010, wherein you asked whether a U.S. resident corporation ("US Co.") which has employed a Canadian resident individual ("Employee") who performs services for US Co. solely in the U.S. is required to withhold Canadian payroll deductions from the wages that it pays the Employee.
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 the obligations of 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") does not interfere with Canada's right to tax its residents on their employment income. The Treaty 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 in Canada in respect of taxes paid to the U.S. on his/her 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.
Even though the services are performed solely in the U.S., because the Employee is resident in Canada, Canada has the right to tax the Employee on the employment income it receives from U.S. Co. If the U.S. also taxes the Employee on the employment income paid by U.S. Co, the Employee will be entitled to a foreign tax credit in computing his/her Canadian taxes payable. The Employee may be able to obtain a "letter of authority" from the Canada Revenue Agency to authorize U.S. Co. to reduce the Canadian deductions at source to take into account the foreign tax credit. For information regarding the letter of authority, please refer to Chapter 5 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