Canadian Government issues guidance on international income tax issues raised by the COVID-19 crisis
On May 22nd, 2020, the Canada Revenue Agency (“CRA”) released guidance (the “Guidance”) on how it will deal with certain international tax issues that have arisen as a result of the travel restrictions (“Travel Restrictions”), or the temporary interruption of certain CRA services resulting from the COVID-19 crisis. Recognizing that some of the Travel Restrictions can have an effect even past the date they are lifted, the CRA indicates in the Guidance that it will consider whether a particular issue arose as a result of such restrictions on a case-by-case basis. The Guidance will apply from March 16 until June 29, 2020, but may be extended or rescinded (if no longer required) by the CRA.
The Guidance does not represent any interpretive position or intention to establish any broader CRA policy, but it is intended to assist taxpayers during the crisis. Moreover, the CRA emphasizes Canada’s commitment to combat international tax evasion and avoidance, and cautions taxpayers from engaging in tax evasion or avoidance schemes that attempt to exploit the crisis or the temporary relieving positions.
There are five topics covered in the Guidance:
Income tax residency;
Carrying on business in Canada / permanent establishment;
Cross-border employment income;
Waiver requests – Payments to non-residents for services provided in Canada; and
Disposition of taxable Canadian property by non-residents.
Income Tax Residency
In general, whether an individual is resident in Canada for Canadian tax purposes is a factual determination based on the individual’s residential ties with Canada (the “common-law test”). In addition, an individual who is physically present in Canada for 183 days or more in a tax year will be deemed to be resident in Canada throughout the year.
Certain individuals may have been visiting Canada at the time the Travel Restrictions were announced and have been unable to return to their country of tax residence as intended. As a result of these circumstances, an individual may meet the common-law test for residency or be deemed to be resident in Canada due to their stay exceeding 183 days, whereas this would not have otherwise been the case.
To address this issue, the CRA states in the Guidance that it will take the following positions with respect to determining residency for Canadian tax purposes:
With respect to applying the common-law test, remaining in Canada because of the Travel Restrictions will not in and of itself cause the common-law test to have been met.
With respect to the 183 day deeming rule, the CRA will not consider the days during which an individual is present in Canada and unable to return to his or her country solely because of the Travel Restrictions. This will be the CRA’s position where, among other things (which are not detailed in the Guidance), the individual shows that he or she intends to return, and does in fact return, to his or her usual country of residence as soon as he or she is able to do so.
A corporation that is established under foreign law can still be considered resident in Canada if the central management and control (“CMC”) is located in Canada.
A tax issue may arise where a foreign corporation has one or more directors in Canada that cannot travel to the foreign jurisdiction for board meetings because of the Travel Restrictions. Normally, the fact that a director is physically present in Canada for board meetings could be an important indicator that the CMC of the particular corporation is in Canada. In such a case, the corporation could be considered to have dual tax residence – in the foreign jurisdiction in which it was established and in Canada.
The Guidance indicates that the CRA will take a different approach on this issue depending on whether or not the corporation in question is subject to an income tax treaty.
If the foreign corporation in question is subject to an income tax treaty, the CRA will consider any applicable tie-breaker rules found in the treaty. Certain tax treaties contain a residency tie-breaker rule that looks at, among other factors, the “place of effective management of the corporation”. Where this rule applies, as an administrative matter, the CRA will not consider that a corporation is resident in Canada solely by virtue of the fact that a director must participate in board meetings while physically in Canada because of Travel Restrictions (although it may decide so based on other factors).
If the foreign corporation in question is not subject to an income tax treaty, the Guidance states that any determinations of corporate residence involving potential dual residency will be considered on a case-by-case basis.
The CRA notes that this approach will also be followed in respect of entities established in foreign jurisdictions that are considered to be corporations for Canadian income tax purposes, such as limited liability companies. It also states that it will consider following a similar approach for commercial trusts, where appropriate.
Carrying on business in Canada / permanent establishment
Non-residents of Canada must pay tax on income earned from “carrying on business in Canada.” Generally, where an income tax treaty applies, a resident of the treaty country will only be required to pay tax in Canada on such business income if it is derived from a “permanent establishment” (“PE”) in Canada, as determined under the relevant treaty.
Due to the Travel Restrictions, non-resident entities that normally employ individuals to work outside Canada may now have such employees fulfilling their duties in Canada. This situation could result in the non-resident entity (i) carrying on business in Canada, and (ii) having a PE in Canada.
As an administrative position, the CRA has stated that it will not consider a non-resident entity to have a PE in Canada solely because its employees perform their duties in Canada due to the Travel Restrictions.
Under Canada’s income tax treaties, subject to certain exceptions, a PE will generally be established in Canada when an agent has and habitually exercises in Canada the authority to conclude contracts in the name of a non-resident of Canada (“dependent agent PE”) (such as Article V(5) of the Canada-United States Income Tax Treaty (“US Treaty”)). The Guidance states that the CRA will not consider a dependent agent PE to have been created for a non-resident entity solely due to a dependent agent concluding contracts in Canada on behalf of the non-resident entity while the Travel Restrictions are in force, provided that such activities are limited to that period and would not have been performed in Canada but for the Travel Restrictions.
Canada’s income tax treaties also generally contain deeming rules regarding enterprises that provide services in Canada that are not otherwise considered to be PEs (“service PE”). The rules deeming a service PE to exist rely on certain presence tests that depend on the length of time the applicable services are provided in Canada. For example, the test in Article V(9)(a) of the US Treaty relies on services that are performed in Canada by an individual who is present in Canada for a period or periods aggregating 183 days or more in any twelve month period. To address how the Travel Restrictions would impact the service PE deeming rules, the Guidance states that the CRA will exclude, in determining whether an individual meets the 183 day presence test in a “services permanent establishment” provision in Canada’s tax treaties, any days of physical presence in Canada due solely to Travel Restrictions.
Where a non-resident entity is not resident in a treaty country, if it can demonstrate that the only reason it is considered to be “carrying on business in Canada” is because of the Travel Restrictions, the CRA will consider whether administrative relief is appropriate on a case-by-case basis.
Cross-border employment income
US resident and other non-resident employees
Under the US Treaty, Canada is permitted to tax salary, wages and other similar remuneration derived by a resident of the United States in respect of employment services provided in Canada. There is an exception if the employee is not present in Canada for more than 183 days in any twelve month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by or on behalf of an employer who is a resident of Canada, or by a PE of the employer in Canada.
Some US residents who regularly exercise their employment in Canada, but who would normally not exceed the 183-day threshold, may now find themselves exercising their employment in Canada for an extended period of time as a result of the Travel Restrictions, and could thus become subject to Canadian income tax on their employment income.
The CRA stated that it will not count the days that individuals exercise their employment duties in Canada solely because of the Travel Restrictions toward the 183 day threshold. Accordingly, treaty relief will continue to apply to these individuals with respect to their employment income.
It will also take the same approach in applying the days of presence test in other treaties.
Canadian resident employees
Under Canadian tax law, a non-resident employer is required to withhold Canadian source deductions from the salary that it pays to a Canadian resident employee, regardless of where the services are rendered. In some cases, the CRA will issue a letter of authority which authorizes the employer to reduce the Canadian source deductions.
Due to the Travel Restrictions, Canadian resident employees that would otherwise work abroad may be temporarily fulfilling their employment duties in Canada. The issue is whether the withholding obligations of the non-resident employer will be impacted by this change.
The CRA’s position is that the withholding obligations of the employer will not change provided that:
the Canadian resident employee is performing its duties in Canada on an exceptional and temporary basis because of the Travel Restrictions;
the employee has been issued a letter of authority for the tax year that includes that period; and
there are no changes to the withholding obligations of the non-resident entity in the other jurisdiction.
Waiver Requests – Payments to non-residents for services provided in Canada
Under Canadian income tax law, amounts must be deducted and remitted from remuneration paid to non-residents in respect of an office or employment services provided in Canada (“Reg 102”). Amounts must also be withheld and remitted from payments made to non-residents in respect of services renders in Canada (other than in respect of an office or employment) (“Reg 105”).
In certain cases, the CRA may issue a waiver such that no deductions or withholdings need to be made under Reg 102 or Reg 105. Such a waiver is often requested when the non-resident recipient is exempt from tax in respect of the payment or remuneration received by virtue of a tax treaty.
Due to the COVID-19 crisis, the processing of waivers (which was previously temporarily interrupted) is being carried out in a limited capacity, resulting in longer processing times. The CRA has stated that urgent waiver requests may be submitted electronically on a temporary basis, and that more information will be provided in this respect.
In addition, if a waiver request has been submitted to the CRA but has not been processed within 30 days due to the temporary interruption, the CRA will not assess a person who fails to deduct, withhold or remit an amount under Reg 102 or Reg 105 in respect of an amount paid to the person covered by the particular waiver request.
The relief is only available where the sole reason the waiver was not obtained in time was due to the interruption in the processing of waivers. Furthermore, the payor must demonstrate that they took reasonable steps to ascertain that the non-resident recipient was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty.
The CRA will review situations where a waiver request was not submitted due to the COVID-19 crisis, yet no amounts were withheld pursuant to Reg 102 and Reg 105, on a case-by-case basis. The CRA will not assess in these situations if it finds that the non-compliance was directly attributable to the effects of COVID-19.
Disposition of taxable Canadian property (“TCP”)
Under Canadian income tax rules, a non-resident vendor who disposes of certain TCP must notify the CRA about the disposition either before they dispose of the property or within ten days after the disposition. When the CRA has received either an amount to cover the tax on any gain on the disposition of property, or appropriate security therefor, the CRA will issue a certificate of compliance (a “Section 116 certificate”).
Absent a section 116 certificate, a purchaser purchasing TCP from a non-resident vendor is required to remit a specified amount to the Receiver General for Canada within a prescribed period, and would usually deduct this amount from the purchase price.
Due to the COVID-19 crisis, the processing of Section 116 Certificates (which was previously temporarily interrupted) is being carried out in a limited capacity, resulting in longer processing times than in pre-COVID periods.
Normally, where the CRA is not able to issue a Section 116 certificate before the time the purchaser’s remittances is due, the purchaser or the vendor may request that the CRA provide a comfort letter, which allows the parties to retain the withheld funds until the CRA’s review is complete.
As a result of the temporary interruption in the processing of Section 116 Certificates, the CRA is allowing urgent requests for comfort letters to be made by email on a temporary basis. Such requests should be made through the CRA’s individual tax enquiries line at 1-800-959-8281.
Any further questions regarding the matter covered in this release or with respect to matters not addressed therein can be submitted to the CRA at [email protected]
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