Canada: Tax considerations for cross-border work
25 June 2014
Posted by: Author: Adrienne F. Oliver
Author: Adrienne F. Oliver (Norton Rose Fulbright Canada LLP)
When Canadian employees of Canadian mining companies work abroad, a number of tax issues arise for both employer and employee. With advance planning, and a combination of tax, employment law and immigration advice, the risks can be managed. So what are the top tax issues that should be considered by Canadian mining companies sending Canadian employees on temporary cross-border work assignments?
1. Residence: Canadian employees considering a foreign assignment must understand the personal tax implications. The key issue will be determining whether the employee will remain a Canadian tax-resident or will become a tax-resident of the country in which the employee will temporarily work (the host country). Both domestic tax laws and any income tax treaty between the two countries must be considered. Generally, the country in which the employee is considered a tax-resident will have the right to tax the employee on the employee's worldwide income, while the other country will have the right to tax any income "sourced" from that country. Employment income will generally be sourced from a country when the employee physically performs employment services in that country.
For example, if an employee working temporarily for a period of 6 months in the US is considered a Canadian tax-resident, and a non-resident of the US, the employee will be subject to Canadian tax on the employee's worldwide income, and will pay US tax on the employee's US-source income.
2. Tax credits: Without any relief, the employee in the example above would be subject to tax in both Canada and the US on US-source employment income. But under Canadian tax laws, residents are generally entitled to a foreign tax credit (FTC) in respect of any foreign tax paid. The employee in this example would generally be required to file a US tax return and pay US taxes on the US-source employment income— and then file a Canadian tax return claiming an FTC. The employee would ultimately pay tax at the higher of the tax rates applicable in Canada or the US.
Canadian-residents working abroad for a Canadian employer for at least 6 months in certain industries, including mining, may also be eligible for an overseas employment tax credit (OETC). However, the OETC is being phased out and will no longer be available after 2015.
3. Payroll withholding obligations: An employer of a Canadian-resident employee is generally required to withhold Canadian income tax from the employee's pay, regardless of whether the employee is working inside or outside Canada. The employer may also be required to withhold host-country income tax where an employee is working abroad. This can result in cash flow issues for the employee because the employee's "take-home" pay throughout the year may be reduced by withholdings in both jurisdictions. Employers may also be required to make Canadian payroll deductions (Canada pension plan and employment insurance) and similar host-country deductions.
Relief from double-withholding for income tax and payroll deductions is available in certain circumstances, but the process of seeking such relief takes time.
4. Tax reimbursement arrangements: It is common for employers asking employees to go on assignments abroad to offer a tax reimbursement arrangement. Typically, such arrangements would reimburse the employee for any taxes payable by the employee in excess of what the employee would normally be liable for in Canada.
5. Taxation of employer: A Canadian employer sending one or more employees abroad must also consider the tax implications to the corporation. An employer may find itself liable to file tax returns and pay income tax in countries where its employees work. Each country will have its own rules for determining when a corporation is subject to income tax, but generally, a corporation may be taxable in a country in which it carries on business. An employer can generally be considered to carry on business in any place in which its employees are located, therefore, it will be important for an employer to consider its compliance obligations and tax liability in an employee's host country. Canada's income tax treaties may provide relief from foreign taxes in such circumstances.
Canadian mining companies sending an employee abroad must address the corporate and personal tax implications of the foreign work arrangement on a timely basis. With advance planning, an employer can minimize the chance of any surprises and maximize the likelihood of a successful arrangement.
This article first appeared on canadianminingjournal.com.