Tax implications for employers whose employees work remotely from a different province

| 12 minutes

Since the COVID-19 pandemic began, a growing number of Canadian companies have been asking their employees to work from home, and in some instances, these employees are working from homes located outside of the province where the employer typically operates or is located. This raises questions of whether such employee home offices could create a “permanent establishment” (“PE”) of the employer in the other province for provincial income tax purposes, and whether the location of the employee’s home office affects the employer’s payroll withholding obligations.[1]

Summary

  1. An employee’s home office is not normally considered to be a “fixed place of business” of the corporate employer, provided that the home office is not objectively identified with the business of the employer. Accordingly, a home office should generally not result in a fixed place of business PE of the employer.
  1. An employee working from home in a province may cause the corporate employer to be deemed to have a PE in that province, if the employee has a general authority to contract on behalf of the corporation. General authority to contract is normally considered to exist if the employee in the ordinary course of business is able to bind the corporation, without prior approval.
  1. A home office is generally not considered to be an “establishment” of the employer for payroll withholding purposes, such that an employee who works full-time from home in a particular province is generally not considered to report for work at an establishment of the employer in that province solely by virtue of the home office. Accordingly, the employee is generally deemed to report for work at the establishment of the employer from which his, her or their remuneration is paid.

Analysis

1. Permanent Establishment for Income Tax Purposes

A Canadian-resident corporation is subject to provincial or territorial corporate income tax if it has a PE in the province or territory.[2] If the corporation has one or more PEs in more than one province or territory, it is taxable in each of those provinces and territories, and its taxable income is allocated to each PE to ensure that the same income is not taxed by more than one province or territory.[3]

(A) “Fixed place of business”

A PE of a corporation for provincial tax purposes includes, a “fixed place of business” of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop, or a warehouse.[4]

The phrase “fixed place of business” is not defined in the Income Tax Act[5] (“ITA”) or the Regulations. The Canada Revenue Agency (“CRA”) has stated that a fixed place of business may include a place, plant or natural resource used in the day-to-day business of the corporation. Where a corporation does not have any fixed place of business, it will have a PE in the principal place in which its business is conducted.[6] The CRA has also stated that generally there is no requirement that a fixed place of business be a place owned or leased by the corporation[7] and, depending on the circumstances, the mere fact that a corporation has a certain amount of space at its disposal which is used for business activities may be sufficient to constitute a place of business.[8] However, as will be discussed in more detail below, an employee’s home office is not normally be considered a PE of the employer, provided the home office space is not under the control of the employer and is not be objectively identified with the business of the employer.

While no formal legal right to use a place is required for a PE to exist, in the case of a home office of an employee, an employer would typically not be expected to exercise the required degree of control over the home office to cause the home office to be a PE. Canadian courts have concluded that if an employee, for purposes of discharging his or her duties under an employment contract, sets up an office in his or her own premises and works remotely, the home office would not normally be considered a PE of the employer provided the home office space was not under the control of the employer and would not be objectively identified with the business of the employer.[9] An employee’s home office could be considered objectively identified with the business of the employer if the home office had the employer’s name displayed where the public could see it, or if the address of the home office is listed in the telephone directory as a place of business for the employer.[10] The CRA has also confirmed that typically a home office would not be viewed as a fixed place of business of the corporation.[11]

Thus provided that an employee’s home office is under the complete control of the employee and is not found to be objectively identified with the business of the corporation, it is unlikely that the home office would be viewed as a “fixed place of business” of the corporation.

(B) “General authority to contract”

In the absence of the existence of a fixed place of business, a corporation may be deemed to have a PE in a particular province if it carries on business through an employee established in that province, who has general authority to contract for his her or their employer (or who has a stock of merchandise owned by the employer from which the employee regularly fills orders which he, she or they receive).[12] The CRA’s published administrative policy is that an employee’s home office generally does not constitute a PE of the employer in a province, unless this condition is satisfied.[13]

Canadian courts have, in the context of deciding whether certain sales representatives have general authority to contract, concluded that an employee does not possess a general authority to contract in the following circumstances:

  • the employee has authority to accept orders from existing customers but cannot open new accounts;[14] and
  • customer orders must first be approved by the head office before contracts can be finalized.[15]

In contrast, where an employee could approve orders without getting prior permission from head office, the court found that the employee had general authority to contract.[16] Although Canadian cases have been limited to situations dealing with sales representatives, it appears that general authority to contract is normally considered to exist where an employee in the ordinary course of business is able to bind the corporation, without prior approval. Therefore, an employee who is a member of a corporation’s senior management team may be more likely to be seen as possessing the general authority to contract and accordingly to constitute a deemed PE of the corporation in the province where such employee is established.

2. Payroll withholding obligations

Generally, an employer paying salary, wages, or other remuneration must deduct or withhold an amount determined under prescribed rules and remit that amount on account of the employee's part I tax under the ITA.[17] Such payroll withholding obligation applies to any payment of remuneration made to an employee who “reports for work at an establishment of the employer.”[18] Since each province imposes its own individual tax rates, the amount of payroll deduction to be withheld is calculated based on an employee’s remuneration multiplied by the tax rates of the province where the employee reports for work.[19]

Therefore, the place where an employee is considered to report for work has implications for both the employer and the employee. From the employer’s perspective, if an employee’s home office is an establishment of the employer, the employer may be required to change its payroll withholding rate; from the employee’s perspective, the personal tax liability will depend upon whether the employee is resident in the province where the employer is located or the province in which the home office is located. An individual employee is considered to be resident in the province where he or she has significant residential ties, and the CRA considers the availability of a dwelling place and the location of the individual employee's spouse or common-law partner and their dependents to be the most significant residential ties.[20]

In determining where a particular employee is considered to report for work for payroll withholding purposes, the CRA has indicated that it will consider factors such as whether the employee is physically present at the employer's establishment to perform his or her regular duties (for example, to produce reports or to analyze and receive directions on the tasks to be performed) and whether the employer assigns the employee an office (or other space) in the employer's establishment to perform his or her usual workload.[21]

If an employee is present at the employer's establishment on a weekly basis to accomplish his or her normal workload, for a period of time that is equal to at least a typical day's work for the employee, the CRA has considered that the employee reports for work at that establishment.[22] In contrast, where an employee’s physical presence at the establishment is limited to a few meetings or information sessions during the year, the CRA views the employee not reporting for work at that establishment.[23]

The CRA has also stated that, generally, a particular workplace is an establishment of an employer only if the employer either owns or is a tenant of the workplace.[24] Accordingly, in circumstances where an employee works out of a home office full-time, the CRA has stated that the employee is generally not considered to report for work at an establishment of the employer.[25]

The Regulations also provide that if an employee is not required to report for work at any establishment of the employer (we can take as an example an employee who works full-time from home in the context of the COVID-19 pandemic), the employee is deemed to report for work at the employer's establishment from which is paid the remuneration that is salary, wages, or commissions.[26]

Therefore, it appears that if an employee is working remotely for a couple of days a week, but nonetheless comes in to work at the employer’s establishment, that employee will be considered to report for work at the employer’s establishment. However, where an employee works remotely on a permanent basis, the employee is deemed to report for work at the employer's establishment from which is paid the remuneration that is salary, wages, or commissions.

Generally, the same rules apply in Québec and the location of an “establishment” is key in determining if Québec employer contributions and payroll withholdings apply. However, even if an employee works and is paid from an establishment located outside Québec, the amounts the employee is paid for a given pay period may still be subject to Québec Parental Insurance Plan premiums, the contribution to the health services fund and the contribution related to labour standards if, for that pay period, the employee can reasonably be considered to be an employee of an establishment located in Québec.[27] Likewise, an employer must include wages or salary paid to an employee employed and paid outside Québec in its total payroll used to calculate its health services fund contribution rate, its participation in workforce skills development and, if applicable, its contribution to the Workforce Skills Development and Recognition Fund if, for that pay period, such employee can reasonably be considered to be an employee of an establishment located in Québec.[28]

Particularly as a result of the COVID-19 pandemic, certain employers have decided to no longer maintain physical workplaces and offices and instead require all employees to work from home on a permanent basis. Depending on the circumstances, this could result in (i) one or more of the employer’s PEs ceasing to exist while other PEs may come into existence (e.g., in the location where those employees with general authority to contract on behalf of the employer are established), thereby affecting the employer’s provincial tax liability, and (ii) a change in the location of the establishment at which employees then required to work from home are deemed to report for work, thereby affecting the applicable payroll withholding rates. For example, if an employer terminates its sole office lease in a particular province and, thereafter, requires all of its employees in such province to work from home, it may cease to have a PE in such province, provided it has no other fixed place of business and none of the PE deeming rules apply[29]. As the employees would be required to work solely from home, they would be deemed to report for work at the employer’s establishment from which they are remunerated (presumably in another province or territory of Canada, or even outside of Canada) and the applicable payroll withholding rates would apply based on the location of such establishment.[30]

***

[1] Employers whose employees work remotely from outside of Canada face additional tax considerations that are beyond the scope of this article.

[2] For example in Ontario, see Taxation Act, 2007, SO 2007, c 11, s 27(1); in British Columbia, see Income Tax Act, RSBC 1996, c 215, s 2(2); or in Quebec, see Taxation Act, RLRQ, c I-3 (the “Quebec Taxation Act”), s 22.

[3]Income Tax Regulations, CRC, c 945 (the “Regulations”), s 402(3); Regulation respecting the Taxation Act, RLRQ, c I-3, r 1 (the “Quebec Regulations”), s 771R1.

[4] The Regulations, s 400(2); the Quebec Taxation Act, s 12.

[5] RSC, 1985, c 1 (5th Supp).

[6] CRA, Interpretation Bulletin IT-177R2 “Permanent Establishment of a Corporation in a Province” (November 11, 2003).

[7] CRA, Views Doc 2010-0378421I7 (October 13, 2010) (“CRA 2010”).

[8]Ibid.

[9]Sunbeam Corporation (Canada ) Ltd. v. MNR, [1962] CTC 657; The Queen v. Dudney, [2000] 2 CTC 56.

[10]Chicago Blower (Canada) Limited v. MNR, 41 Tax ABC 292.

[11] CRA 2010, supra note 7.

[12] The Regulations, s 400(2)(b); the Quebec Taxation Act, s 13.

[13] CRA 2010, supra note 7.

[14] CRA, Views Doc 2003-0021195 (December 18, 2003); Also see Ronson Art Metal Works (Canada) Limited v. MNR, 15 Tax ABC 433; Chicago Blower (Canada) Limited v. MNR, 41 Tax ABC 292.

[15]Canadian Thermos Products Limited v. MNR, 26 Tax ABC 155; Sunbeam Corporationsupra note 9; Chicago Blowersupra note 10.

[16]Enterprise Foundry (N.B.) Ltd. v. Minister of National Revenue, 64 D.T.C. 660.

[17] ITA, s 153(1)(a); the same rule applies in Québec, see the Quebec Taxation Act, s 1015 para 1-3.

[18] The Regulations, s 102(1)(a); the Ministère du Revenu took the same position in regard with the Quebec Taxation Act, s 1015, see REVENU QUÉBEC, Interpretation Bulletin IMP. 1015-1/R1, “Deduction at Source in Respect of a Salary, Wages or Commission”, July 31, 1990, para 3.

[19] The Regulations, s 102(2); REVENU QUÉBEC, Guide TP-1015, “Guide for Employers: Source Deductions and Contributions”, 2020, p 72. Special rules apply to a commission-remunerated employee who makes an election under the Regulations or the Quebec Regulations, as applicable.

[20] CRA, Income Tax Folio S5-F1-C1.

[21] CRA, Views Doc 2015-0620821I7 (February 4, 2016).

[22]Ibid.

[23]Ibid.

[24]Ibid.

[25]Ibid.

[26] The Regulations, s 100(4).

[27] Guide TP-1015, supra note 19p 95.

[28]Ibid. Anti-avoidance rules may apply where an employee works in or is paid from an establishment located outside Canada.

[29] See The Regulations, s. 400(2). 

[30] The CRA’s guidance notes that if a particular employee does not have to report to work at an employer’s establishment in person (i.e., the employee is required to work from home), then the location from which the remuneration is paid would normally be the location of the employer’s payroll department or payroll records. See CRA, “Which provincial or territorial tax tables should you use?” <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/set-up-new-employee/filing-form-td1/which-provincial-territorial-tax-tables.html> accessed 25 August 2020.

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