Taxation of international executives
Are there special residency considerations for short-term assignments?
An individual is deemed to be a resident of Canada if they stay in Canada for 183 days or more during a tax year, and is not otherwise a resident of Canada (also referred to as the “sojourning” or “183-day” rule).
However, if the individual is primarily a resident of another jurisdiction that has a tax treaty with Canada and, under the residency tie-breaker rules in that treaty, the individual is primarily resident in that other jurisdiction, they will be deemed, under a specific rule in the Income Tax Act (Canada), to be a nonresident of Canada for tax purposes regardless of the sojourning rule described above or the other Canadian domestic residency rules. The Québec Taxation Act does not have a similar rule for Québec provincial tax purposes.
Are there special payroll considerations for short-term assignments?1
Employers, whether they are residents or nonresidents of Canada, are required to withhold and remit Canadian taxes with respect to all amounts characterized as employment income earned in Canada, even if those amounts are exempt from Canadian income tax under the provisions of an applicable income tax convention, unless a formal waiver letter has been obtained from the CRA. Identical Québec provincial withholding requirements apply to compensation earned by employees working in the province of Québec unless a formal waiver is obtained from the MRQ. Employers who fail to obtain waivers or to withhold taxes from Canadian source compensation are liable to pay those taxes themselves in addition to penalties (which range from 10 percent to 20 percent) and arrears interest that may be assessed on those taxes.
Non-residents need to declare their status when completing Form TD1 “Personal Tax Credits” to determine the correct amount of payroll withholdings. If less than 90 percent of the non-resident’s worldwide income for the relevant calendar year will be included when determining taxable income earned in Canada, the non-resident is not entitled to certain tax credits allowed for residents.
What income will be taxed during short-term assignments?
If the individual on a short-term assignment is considered a deemed resident for taxation purposes because the individual was physically present in Canada for more than 182 days during the calendar year and was unable to claim the befit of the residency tie-breaker rules in a tax treaty between Canada and their home country/territory, the individual:
If the individual is considered to be a non-resident of Canada for taxation purposes, then only employment and self-employment income earned from performing services within Canada, gains realized from the sale of Canadian Taxable Property and any investment income, except for most types of interest, received from Canadian sources will be subject to Canadian taxes.
An employee who works at a special work site may have certain benefits that can be excluded from their income. These benefits include:
The term "temporary" refers to the duration of duties performed by the individual employee rather than the project as a whole. The length an assignment may last and still qualify for the special work site exclusion is not defined in the Income Tax Act. However, as a general rule, duties will be considered by the CRA to be of a temporary nature if it reasonably can be expected, at the assignment’s outset, that they will not continue beyond 2 or 3 years. Subsequent extensions of the assignment may still qualify for the special work site exemptions, but this issue should be reviewed each year to assess whether to continue claiming the exemption.
Are there any additional considerations that should be considered before initiating a short-term assignment in Canada?
Employees should obtain proper work permits and immigration clearance before working in Canada.
1CRA - Non-resident workers
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