Considerations, Planning and Compliance

Report
Tax Issues for Cross-Border Employers:
Considerations, Planning and Compliance
James A. Fraser
North York District CA Association Meeting
September 24, 2013 – Donalda Club
1
Non-Residents & Carrying on Business
in Canada
• Over the past few years, increased interest and
business activity of non-resident (NR)
businesses in Canada
• NR businesses often send NR employees to
Canada for:
– Marketing – Sales Staff
– Operations – Managers
– Services – Technicians & Specialized Staff
2
Principal Cross-Border Canadian Tax
Issues for Service Providers
1. Ensuring the NR business does not have a PE
in Canada under the Services PE Rules in the
applicable tax treaty
•
e.g., Article V(9) of the US Treaty
2. Minimizing Canadian tax compliance burden for
NR employees
•
•
i.e., source deductions, tax returns
“Income from Employment” Rules in applicable tax treaty,
e.g., Article XV(2) of the US Treaty
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Services PE Rules in the US Treaty –
Article V(9)
9.
Subject to paragraph 3, where an enterprise of a Contracting State
provides services in the other Contracting State, if that enterprise is found
not to have a permanent establishment in that other State by virtue of the
preceding paragraphs of this Article, that enterprise shall be deemed to
provide those services through a permanent establishment in that other
State if and only if:
a)
b)
those services are performed in that other State by an individual who is present
in that other State for a period or periods aggregating 183 days or more in any
twelve-month period, and, during that period or periods, more than 50 percent
of the gross active business revenues of the enterprise consists of income
derived from the services performed in that other State by that individual; or
the services are provided in that other State for an aggregate of 183 days or
more in any twelve-month period with respect to the same or connected project
for customers who are either residents of that other State or who maintain a
permanent establishment in that other State and the services are provided in
respect of that permanent establishment.
4
US Treaty – Article V(9) (Cont’d)
•
If NR satisfies either test in Article V(9) of the US Treaty, it will be deemed
to be providing services through a PE in Canada and thereby subject to
Canadian tax on profits attributable thereto.
•
The first test (Article V(9)(a)) requires (i) services to be performed by an
individual present in Canada for an aggregate of 183 days or more in any
12-month period, and (ii) 50% of the gross active business revenues during
that period are derived from that individual in Canada.
•
The second test (Article V(9)(b)) requires services to be 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 resident in
Canada or have a PE in Canada.
– This test makes the day count for NR’s employees working in Canada for
Canadian customers very important.
– The day count in Article V(9)(b) is based on an “enterprise” formula that counts
each day in a 12-month period that the NR has an employee in Canada
performing services (including any Canadian employees).
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US Treaty – Article V(9)(b)
• The CRA has adopted an expansive view of providing
services in Canada for purposes of the day count under
the US Treaty that can include the services provided by
arm’s length and non-arm’s length subcontractors
– "Canada Revenue Agency and Revenu Québec Round Table,"
2011 Canadian Tax Foundation Conference
– "Canada Revenue Agency Round Table," 2009 Canadian Tax
Foundation Conference
– CRA Technical Interpretations: 2011-0421371E5, 20100391541E5, 2010-0381951E5
• Is subcontracting a solution?
6
US Treaty – Article V(9)(b): Implications for
Subcontracting
• The CRA distinguishes between resident and
non-resident subcontractors
– Takes the position that services subcontracted to a
Canadian resident non-arm’s length subsidiary for an
arm’s length fee do not count towards the nonresident parent’s day count
– However, the CRA takes the opposite position when
services are subcontracted to a non-arm’s length nonresident subsidiary (even at an arm’s length fee)
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Income from Employment Rules in the US
Treaty – Article XV(2)
2. Notwithstanding the provisions of paragraph 1,
remuneration derived by a resident of a Contracting
State in respect of an employment exercised in a
calendar year in the other Contracting State shall be
taxable only in the first-mentioned State if:
a) such remuneration does not exceed ten thousand dollars
($10,000) in the currency of that other State; or
b) the recipient is present in the other Contracting State for a
period or periods not exceeding in the aggregate 183 days in
that year and the remuneration is not borne by an employer
who is a resident of that other State or by a permanent
establishment or a fixed base which the employer has in that
other State.
8
US Treaty – Article XV(2)
•
Pursuant to the “Income from Employment”
provisions in Article XV(2) of the US Treaty, a US
employee will not be subject to Canadian tax on
his/her remuneration from exercising employment in
Canada if:
i.
his/her remuneration does not exceed $10,000; or
ii.
he/she is not present in Canada for more than 183 days in any
12-month period commencing or ending in a relevant fiscal
period and such remuneration is not paid by a Canadian
resident or borne by a permanent establishment in Canada.
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US Treaty – Article XV(2): Implications for
Employers/Employees
• Provided a US employee falls within the exemption in
Article XV(2) of the US Treaty, US employer can apply to
the CRA for a waiver of the obligation to make payroll
withholdings for Canadian income tax.
• This would effectively eliminate the US employee’s
obligation to file Canadian returns because there would
be no Canadian income tax with respect to employment
income and there would be no penalties for not filing.
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Planning Implications: An Example
• Background:
– US software company (“USco”) with Canadian
customers
– Usco provides offsite & onsite services
• Software license agreement
• Implementation services agreement
• Maintenance services agreement
• USco employees (US residents)
performing/providing services in Canada
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Example
• Background (cont’d):
– USco carrying on business in Canada
– USco and US employees entitled to benefits under
the US Treaty
– Objective #1: No PE for USco in Canada
– Objective #2: Minimize Canadian compliance for US
employees
– Assume relief/treaty protection under Services PE
and Income from Employment Rules
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Example: Compliance & Considerations
• Reg. 105 – 15% withholding
• Canadian tax return for USco
• Canadian payroll withholding waivers
– Reg. 102
– Certificates of Coverage: CPP/Social Security
• T4 Slips
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Example
USco
US
Canada
1.
Offsite services of US
employees
2.
Onsite services of US
employees
1.
2.
CDN
Custome
r
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Example – Canadian Employees of USco
• Background:
– USco’s Canadian business has continued to expand
• Need for staff in Canada full-time
– USco looking to hire Canadian resident employees
for marketing, customer relations and software
maintenance
• Plan to put them on USco’s payroll
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Canadian Employees of USco:
Compliance and Considerations
• Source deductions for Canadian employees: CPP, EI, tax, CRA
payroll number
• Services PE Rules – US Treaty
– Presence of Canadian resident employees in Canada throughout any
12-month period will give rise to a Services PE in Canada (i.e., 183 day
count)
• Income from Employment Rules – US Treaty
– No relief from Canadian tax available if remuneration borne by a PE in
Canada
– Source deductions for US employees
– Canadian tax return for US employees
• Should USco incorporate a Canadian subsidiary (Canco)?
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Incorporating Canco
• Canco to provide services in Canada for Canadian
customers
– Can reduce or eliminate Reg. 105 withholding
– Canco enters into agreements with Canadian customers
• Implications of subcontracting by USco?
• Canco to employ Canadian employees
– Helps to manage USco’s day count for purposes of the Services
PE Rules (to the extent that US employees continue to come to
Canada)
– Helps preserves treaty relief for US employees who travel to
Canada for work
– Reduces compliance burden for USco and US employees
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Example – Canadian Employees of USco
USco
1.
US
Canada
1.
Offsite services of US
employees
2.
Onsite services of
Canadian employees
Canco
2.
CDN
Customer
18
Example – Employees of USco’s Indian
subsidiary
• Background:
– Indian resident employees of USco’s Indian
subsidiary (“Indco”) will be travelling to Canada to
provide onsite services
– Indco carrying on business in Canada
– Assume relief/treaty protection under Services PE
and Income from Employment Rules under the India
Treaty
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India Treaty – Services PE Rules
• If Indco satisfies either test in Article 5(2)(l) of the India
Treaty, it will be deemed to be providing services
through a PE in Canada and thereby subject to
Canadian tax on the profits attributable thereto.
• The first test (Article 5(2)(l)(i)) requires services to be
furnished in Canada for an aggregate of more than 90
days in any 12-month period.
• The second test (Article 5(2)(l)(ii)) deems a PE where
services are provided in Canada for a related
enterprise.
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India Treaty – Income from Employment
Pursuant to the Income from Employment provisions in Article 15(2) of
the India Treaty, an Indian employee of Indco will not be subject to
Canadian tax on his/her remuneration from exercising employment in
Canada if:
i.
he/she is not present in Canada for more than 183 days*** in the
relevant fiscal period; and
ii. such remuneration is not paid by a Canadian resident or borne by a
permanent establishment in Canada.
***
However, the application of the Services PE rule in Article 5(2)(l)(i) of the India
Treaty effectively reduces the Income from Employment exemption in Article 15(2) to
90 days because a Service PE in Canada for Indco would put the Indian employees
offside of the second condition for the exemption.
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Indco Employees in Canada: Compliance
and Considerations
• Indco provide (certain) services in Canada for Canadian
customers
– Indco enters into agreements with Canadian customers
• Implications of subcontracting by USco
– Reg. 105 – 15% withholding
– Canadian tax return for Indco
• Canadian payroll withholding waivers
– Reg. 102
– Certificates of Coverage: CPP/Social Security
• T4 Slips
22
Example: Indco Employees
USco
Indco
1.
US/India
Canada
1.
Offsite services of US
employees
2.
Onsite services of Indian
employees
3.
Onsite services of Canadian
employees
2.
Canco
3.
CDN
Custome
r
23
Services PE Risk based on Day Count
• Consider secondment of US employees and/or
Indian employees to Canco to deal with day
count issues for USco and Indco
– Helps manage day count if USco and Indco are
bumping up against respective 182 and 90 day
thresholds
• However, secondment structure increases the
compliance burden for NR employees because
their remuneration would be borne by a Canco
(i.e., a Canadian resident)
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