Employers’ Guide to Specific Tax, Reporting Obligations for Remote Workers to the CRA: Canadian Tax Lawyer

Introduction: A Canadian Employer Has Specific Tax and Reporting Obligations

Since the COVID-19 Pandemic, the shift to remote work has transformed the employment landscape in Canada. It is estimated that about 40% of Canadians either work completely remotely or follow a hybrid arrangement. Many Canadians have also expressed that if they were forced to return to the office full-time, they would likely leave their current employer and seek new employment opportunities.

The shift to remote work has undoubtedly transformed the employment landscape in Canada, bringing new challenges for Canadian employers, particularly in tax compliance and reporting obligations. Employers must navigate complex tax rules that govern payroll deductions, cross-border employment, employee benefits, and workplace expenses. Understanding these responsibilities is critical for employers to avoid penalties and ensure tax compliance.

This article provides an overview of Canadian employers’ tax and reporting obligations related to remote work and covers common issues related to employees who work remotely.

An Employer’s Responsibility: Payroll Deductions and Remittances

Canadian employers must deduct and remit to CRA certain taxes for employees, whether they work remotely or in the office. Statutory deductions generally include Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) contributions, Employment Insurance (EI) premiums, and applicable income taxes calculated based on the Personal Tax Credits Return, also known as the TD1 Form.

Employers in Canada must also contribute to CPP/QPP and EI, matching employee contributions. Ensuring accurate payroll calculations and timely remittances to the CRA is crucial for employers in Canada to avoid penalties and interest. Failure to properly set up and administer payroll can have significant tax liabilities for the employer. A director of a corporation may be held personally liable for tax arrears related to payroll deductions, similar to liability for unremitted GST/HST.

Canadian employers are also responsible for filing T4 slips to report deductions, taxable earnings, and other relevant information. T4 slips must be issued to employees and filed with the CRA by the last day of February following the end of a calendar year. The Canada Revenue Agency may charge penalties if an employer files the T4 slips late, with the penalty calculated based on the number of slips filed late. The minimum penalty is $100, with the maximum penalty capped at $7,500.

The New Canada Revenue Agency (CRA) Administrative Policy, Effective on January 1, 2024

Effective January 1, 2024, the Canada Revenue Agency (CRA) implemented a new administrative policy to determine the province or territory of employment (POE) for payroll deduction purposes for employees working remotely. Employers are advised to review and, if necessary, adjust their payroll systems to comply with this updated policy.

Accurately determining the POE is essential to ensure the correct withholding and remittance of payroll deductions, thereby avoiding potential penalties or interest charges due to non-compliance with CRA requirements. The POE of an employee is determined by several factors, including the type of income an employee receives, the residency status of the employee, and the establishment of the employer where the employee reports for work. If an employee works from home, the employee’s home office is generally not considered an establishment of the employer.

Before the updated policy, the POE of an employee was generally either the province in which the employer’s establishment to which the employee reports for work is located, or the province from which the employee is paid, if the employee works remotely.

Under the new administrative policy, when a full-time remote work agreement exists and where the employee can be reasonably attached to an establishment of the employer, the employee is considered to be reporting for work at an establishment of the employer. The first step is to determine whether a full-time remote work agreement is in place. The Canada Revenue Agency considers a full-time remote work agreement to exist between an employer and an employee if the following criteria are met:

• the remote work agreement can be temporary or permanent;
• the employer directs or allows employees to perform their employment duties full-time (100%) remotely;
• the employment duties are to be performed at one or more locations that are not establishments of the employer; and
• the employer and the employee must be able to justify that a full-time remote work agreement was made.

The second step, after confirming the existence of a full-time remote work agreement, is to determine whether the employee is reasonably considered to be attached to an establishment of the employer by assessing both primary and secondary indicators.

The primary indicator focuses on whether the employee would “physically come to work to carry out the functions related to their employment duties at that establishment, if it was not for the full-time remote work agreement.” An employee who used to physically report to an establishment of the employer immediately before entering a full-time remote work agreement is considered reasonably attached to the employer’s establishment, unless the employee’s circumstances or job positions and responsibilities have changed.

The CRA also provides a list of secondary indicators to further assist in determining the establishment of an employer, including:

• the establishment where the employee attends or would attend in-person meetings;
• the establishment where the employee receives or would receive work-related material, equipment, instructions, and/or assistance;
• the establishment where the employee comes or would come in person to receive instructions from their employer regarding their job duties;
• the establishment that is responsible for or supervises the employee, as indicated in the contractual agreements between the employer and the employee; and
• the establishment to which the employee would report based on the nature of the duties performed by the employee.

Determining whether an employee is reasonably considered to be attached to an establishment of the employer is a fact-specific analysis and all indicators should be assessed together. If there is more than one establishment of the employer that an employee can be reasonably considered to be attached to, the same indicators should be used to determine which establishment the employee is most closely attached to.

Additional Tax and Reporting Obligations for Non-Resident Employees

When an employee ceases to be a Canadian tax resident or if an employer hires a non-resident employee, the employer may have additional tax and reporting obligations. The most common one is the non-resident withholding tax. Under the Income Tax Regulation, employers in Canada are required to withhold tax on remuneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver or obtaining certification as a Qualifying Non-Resident Employer.

A treaty-based waiver relieves a Canadian employer from the obligation to withhold certain taxes for a non-resident employee, provided that the non-resident employee resides in a country that has a tax treaty with Canada to exempt the employee from Canadian taxation on employment income. The employer must apply for and obtain such a waiver from the Canada Revenue Agency.

A non-resident employer in Canada, instead of applying for a treaty-based waiver, can apply for certification as a Qualifying Non-Resident Employer. A Qualifying Non-Resident Employer is an employer that is certified under subsection 153(7) of the Income Tax Act (Canada) and is either resident in a country that has a tax treaty with Canada, or would be considered resident in a country that has a tax treaty with Canada, if the country treats the employer as a corporation for tax purposes.

To be certified as a Qualifying Non-Resident Employer, an employer must submit a Form RC473 to the CRA for approval. The CRA must receive the form at least 30 days before a Qualifying Non-Resident Employee of the employer begins providing services in Canada. A Qualifying Non-Resident Employee is an employee that is:

• is resident in a country that has a tax treaty with Canada;
• does not have to pay tax in Canada on the employment income because of a tax treaty exemption; and
• works in Canada for less than 45 days in the calendar year that includes the time of the employment income payment or is present in Canada for less than 90 days in any 12-month period.

Pro Tips – Keep Track of Your Employees’ Tax Residence and Physical Location by Entering Into Remote Work Agreements

An employer is responsible for remitting payroll deductions and relevant withholding taxes accurately and promptly to the CRA. Failure to correctly remit payroll deductions and taxes correctly can result in significant penalties and interest. As a result, it is important to keep track of your employees’ tax residence and physical location, both of which can impact payroll deductions.

For example, the Income Tax Regulations require employers in Canada to withhold tax on remuneration paid to non-resident employees who are employed in Canada. If an existing employee ceases to become a Canadian tax resident while working for the same employer, the employer must take action to adjust tax remittances or seek a treaty-based waiver accordingly.

It is highly suggested for an employer in Canada to consult with a Canadian tax lawyer to enter into a written agreement with a full-time employee who works entirely remotely. The written agreement, also known as a Remote Work Agreement, can provide both the employer and the employee with clear terms and conditions related to the employment relationship.

The written agreement can stipulate, for example, that the employee must update his or her tax residence with the employer within a certain amount of time if the taxpayer ceases to be a Canadian tax resident and must update his or her physical location with the employer before the end of a calendar year if the taxpayer moves to a different province in Canada.

If you are an employer struggling to understand your payroll deductions and/or non-resident withholding tax obligations, you should engage one of our expert Canadian tax lawyers. Our expert Canadian tax lawyers can provide legal advice, identify any areas of concern, and assist you with a tax audit.

FAQ

What Are Payroll Deductions?

Payroll deductions in Canada refer to the amounts an employer deducts from an employee’s paycheque before the employee receives net employment income. These deductions are typically required by law or agreed upon between the employer and the employee. Statutory deductions, which are generally mandatory, commonly include Canada Pension Plan (CPP) Contributions/Quebec Pension Plan (QPP), Employment Insurance (EI) Premiums, and Federal and Provincial Income Tax. Voluntary deductions can include Registered Retirement Savings Plan (RRSP) contributions, additional employment benefits such as health and dental insurance, Union Dues, and Charitable Donations.

Employers must ensure these deductions are correctly calculated and remitted to the appropriate authorities. Employees can check these deductions on their pay stubs and annual T4 slips when filing their Canadian income tax returns.

What Happens When an Employer Fails to Remit Payroll Deductions Correctly or in a Timely Manner?

If an employer in Canada fails to remit payroll deductions correctly or on time, the employer may face serious tax liability and other consequences. There may be significant penalties and interest. If the CRA initiates enforcement actions, the CRA can freeze the employer’s bank accounts, seize the employer’s assets, or revoke the employer’s business number. In certain cases, directors of a corporation can be held personally liable for unremitted payroll deductions and may even face criminal charges for tax fraud or tax evasion.

However, if an employer becomes aware of any tax-related problem before the Canada Revenue Agency does, the employer may be able to make a Voluntary Disclosure Application to seek interest and penalty relief. If there are any circumstances that caused the employer’s failure to remit payroll deductions correctly, interest relief may also be available via a Taxpayer Relief Request.

 

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.