Canada’s Finance Minister delivered the government’s 2015 pre-election federal budget on April 21, 2015. The major tax changes in the budget include increasing the annual Tax-Free Savings Account contribution limit beginning in 2015, relaxing the annual Registered Retirement Income Fund (RRIF) withdrawal limits, and relieving withholding tax requirements for nonresident employers who send their employees to work in Canada for short periods of time. Multinational employers sending assignees to work in Canada may see their withholding obligations eased for employees with Canadian source income, under certain conditions, but the administrative burden for large corporations or those with complex international structures may actually increase.
Canada’s Finance Minister Joe Oliver delivered the government’s 2015 pre-election federal budget on April 21, 2015.1
The major tax changes in the budget include increasing the annual Tax-Free Savings Account contribution limit to $10,000 (from $5,500) beginning in 2015, relaxing the annual Registered Retirement Income Fund (RRIF) withdrawal limits, and relieving withholding tax requirements for nonresident employers who send their employees to work in Canada for short periods of time.
Multinational employers sending assignees to work in Canada may see their withholding obligations eased for employees with Canadian source income, under certain conditions; but the administrative burden for large corporations or those with complex international structures may actually increase. In cases where the assignee-employee meets the exemption criteria under a tax treaty and is not in Canada for 90 days or more in any 12-month period that includes the time of the payment, the employer may enjoy an exception from the usual withholding requirements. To qualify for the exemption, the employer must not carry on business in Canada through a Canadian permanent establishment and must obtain certification from the Canada Revenue Agency (CRA).
Although the budget’s other tax changes were minor, they may nonetheless affect cost projections for future assignees and budgeting for international assignments to Canada and from Canada where the assignee will be subject to Canadian taxation. Furthermore, any resultant tax differentials may impact tax equalizations. Finally, where appropriate, payroll administrators should make adjustments to withholdings once these rules are enacted.
Nonresident employers that send their employees to work in Canada for short periods of time were previously required to withhold and remit Canadian tax on the employees’ Canadian source income, regardless of whether that income would ever be subject to Canadian tax. Under the terms of many of Canada’s tax treaties, nonresident employees are generally not required to pay tax in Canada if the number of their working days in Canada, or the total remuneration they earn in Canada, is relatively nominal. As a result, the requirement to withhold and remit Canadian tax in these circumstances has always placed an unnecessary administrative burden on employers.
The budget introduces an exception to these withholding requirements for payments made after 2015. To qualify, the employee must meet the exemption criteria under a tax treaty and must not be in Canada 90 days or more in any 12-month period that includes the time of the payment. At the same time, the employer must be resident in a treaty jurisdiction, must not carry on business in Canada through a Canadian permanent establishment of the employer, and must be certified by the CRA.
While the proposed changes to the regulation 102 withholding requirements may benefit companies with low cross-border employee travel, the changes do not remove all of the administrative burdens and may actually increase the administrative burden for larger corporations or those with complex international structures. In particular, the proposals do not relieve employers or employees from their reporting requirements (i.e., wage reporting on T4 slips and personal tax return filings) and there could be uncertainty and operational complexity in the application of the eligibility criteria.
Where an employee’s travel to Canada straddles two calendar years or occurs over multiple trips it is unclear, under the 90-day rule, at what point withholding tax will apply and whether employers will have to retroactively withhold tax. As well, payroll and/or HR systems may have to be configured to track the 90-day requirement over rolling 12-month periods.
To qualify for the proposed exception, an employer must not carry on business in Canada through a permanent establishment in Canada. The concept of permanent establishment is inherently complex and creates a practical impediment to relying on the proposed exception. The Canada-U.S. tax treaty will have to be considered in determining whether the employer has a permanent establishment in Canada.
Under article V(9) of the Canada-U.S. treaty, for example, an entity is deemed to have a permanent establishment in Canada if the services are provided in Canada for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are Canadian residents or have Canadian permanent establishments. The requirement that there be no permanent establishment in Canada to obtain regulation 102 relief may impose an added complexity by having to track days spent by multiple employees on a particular project over various start and end dates.
To qualify for the exception, the employer must be certified by the CRA. The details of the certification process are not yet available.
The budget increases the Tax-Free Savings Account annual contribution limit to $10,000 (from $5,500), effective for the 2015 and subsequent taxation years. The annual limit will not be indexed to inflation.
The budget reduces the minimum amount that seniors must withdraw each year from their Registered Retirement Income Funds (RRIF). The budget lowers the minimum withdrawal factor to 5.28 percent at age 71 (from 7.38 percent) to 18.79 percent at age 94 (from 20 percent). At age 95 and above, the percentage remains capped at 20 percent. These measures are effective for the 2015 and subsequent taxation years.
RRIF holders who, at any time in 2015, withdraw more than the reduced 2015 minimum amount can re-contribute the excess to their RRIFs (up to the amount of the reduction in the minimum withdrawal amount provided by this measure). Re-contributions will be allowed until February 29, 2016 and will be deductible for the 2015 taxation year. Similar rules will apply to those receiving annual payments from a defined contribution Registered Pension Plan (RPP) or a Pooled Registered Pension Plan (PRPP).
The budget increases the Lifetime Capital Gains Exemption to $1 million of capital gains (from $813,600) realized by an individual on the disposition of qualified farm or fishing property. This measure applies to dispositions of qualified farm or fishing property that occur on or after April 21, 2015. The Lifetime Capital Gains exemption on capital gains realized on the disposition of qualified farm or fishing property will be the greater of $1 million and the indexed Lifetime Capital Gains Exemption that applies to capital gains realized on the disposition of qualified small business corporation shares.
The budget announces a 15-percent non-refundable tax credit for seniors and persons with disabilities to help with the costs of making improvements to the safety, accessibility and functionality of a dwelling.
Taxpayers that own foreign property with a cost of more than $100,000 are currently required to report such property, and the income earned thereon, on Form T1135 each year. Revisions to Form T1135 in recent years have created significant compliance issues for taxpayers, due to the increased detail required for such property. The budget attempts to ease some of this burden by introducing a more streamlined form for taxpayers with foreign property with a total cost of up to $250,000. The CRA is still developing the simplified form, which will be effective for taxation years beginning after 2014.
Individual taxpayers are able to file Form T1135 electronically for the 2014 and future taxation years unless attachments are required, in which case the form must be paper-filed. According to the CRA, electronic filing of Form T1135 will be available at a future date for corporations, partnerships and trusts and the CRA will announce when the service becomes available.
The budget amends the repeated failure to report income penalty to apply in a taxation year only where a taxpayer fails to report at least $500 of income in the year and in any of the three preceding taxation years. The amount of the penalty will be the lesser of:
This measure will apply to the 2015 and subsequent taxation years.
The budget bills must still be introduced in the House of Commons and the Senate for debate before they can become law. Some of the budget tax measures may be passed into law before the upcoming October 19, 2015 federal election. Measures that are not passed into law before the election will have to be reintroduced by the new government after the election before they can become law.
1 For the budget speech and related documents, see: http://www.budget.gc.ca/2015/home-accueil-eng.html.
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