The Canada Revenue Agency (CRA) issued guidance addressing the residency of foreign affiliates and qualifying non-resident employees—cross-border tax issues caused by travel restrictions during the coronavirus (COVID-19) pandemic.
Specifically, the CRA confirmed 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 because of the 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.
Residency issue for foreign affiliates
The CRA's expanded guidance states that when 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 that the corporation is no longer a resident of that country for surplus calculation purposes solely for this reason. The CRA advised 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 carrying on an active business in a jurisdiction with which Canada has entered into a tax information exchange agreement (TIEA), instead of an 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.
Non-resident employer withholding issue
The CRA also expanded its guidance to address certain non-resident employees that may have otherwise lost their status as "qualifying non-resident employees." The CRA guidance advises that the CRA will not count the days during which a non-resident individual is working or present in Canada and cannot return to the 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 stated that it will apply this position when 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 the country of residence as soon as the employee can.
A non-resident employer that is certified as a "qualifying non-resident employer" will not have to withhold and remit tax on payments to employees who retain qualifying non-resident employee status. The CRA also noted 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 the country of residence due to travel restrictions, as well as the employment income for these days of work in Canada.
Read a September 2020 report prepared by the KPMG member firm in Canada
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