The CRA addresses residency of foreign affiliates and qualifying non-resident employees
The CRA has expanded its guidance on cross-border tax issues caused by travel restrictions during COVID-19. Specifically, the CRA confirms that the residence of a foreign affiliate of a Canadian corporation in a treaty jurisdiction for surplus calculation purposes will not necessarily change solely because the foreign affiliate's director cannot participate in board meetings due to the current COVID-19 travel restrictions. In addition, the CRA guidance now states that certain non-resident employees may not lose their status as "qualifying non-resident employees" due to prolonged stays in Canada due to travel restrictions. As a result, their non-resident employer may not have to withhold and remit Canadian income tax on employment income they pay to those employees, if the employer is certified as a qualifying non-resident employer.
The CRA updated its online guidance to reflect these changes on September 2, 2020.
The CRA issued guidance in May 2020 to address cross-border income tax issues caused by COVID-19 related travel restrictions. The guidance was initially applied from March 16, 2020 to June 29, 2020 but has been extended twice since (to August 31, 2020 and September 30, respectively). The CRA says that taxpayers are advised to contact the CRA if their situation persists past September 30, 2020.
Generally, the guidance describes the CRA's approach to:
The guidance also includes additional information for requesting certain waivers. For further details, see TaxNewsFlash-Canada 2020-70, "CRA Further Extends Travel Restrictions Relief". The CRA expanded this guidance on September 2, 2020 to address issues raised by the travel restrictions related to residency of foreign affiliates for surplus purposes, and the status of "qualifying non-resident employees".
CRA clarifies residency issue for foreign affiliates
The CRA's expanded guidance states that, where a director of a foreign affiliate resident in a treaty country before the travel restrictions is unable to participate in board meetings because of the current COVID-19 travel restrictions, the CRA will not consider the corporation to no longer be resident in that country for surplus calculation purposes solely for that reason. The CRA advises that it will determine corporate residency involving foreign affiliates resident in non-treaty countries before the travel restrictions on a case-by-case basis.
It is unclear whether a foreign affiliate resident and carrying on an active business in a jurisdiction with which Canada has entered into a Tax Information Exchange Agreement (TIEA), rather than a bilateral income tax treaty, the income from which would normally be eligible for exempt surplus characterization, would be covered by the CRA's guidance relating to foreign affiliates resident in treaty jurisdictions.
CRA clarifies non-resident employer withholding issue
The CRA has also expanded its guidance to address certain non-resident employees that may have otherwise lost their status as "qualifying non-resident employees". The CRA advises that it will not count the days during which a non-resident individual is working or present in Canada and cannot return to their country of residence due to the travel restrictions when calculating whether the individual has reached 45-days worked in Canada or 90-days present in Canada, under the "qualifying non-resident employee" definition.
The CRA says that it will apply this position where it can reasonably be shown that the employer expected the employee to leave Canada before losing their "qualified non-resident employee" status, and the employee returns to their country of residence as soon as they can. A non-resident employer who is certified as a "qualifying non-resident employer", will not have to withhold and remit tax on payments to employees who retain their qualifying non-resident employee status. The CRA also notes that to retain its certification, the employer must track and document the days during which the qualifying non-resident employee is working or present in Canada and cannot return to their country of residence due to travel restrictions, as well as the employment income for these days of work in Canada.
For more information, contact your KPMG advisor.
Information is current to September 22, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.
© 2021 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.