By Frank Casciaro, CPA, CGA
The tax implications of international employee transfersBusiness & Professional consulting engineering firms Human Resources
It can be challenging to navigate the complex environment for international employee assignments.
Often, for consulting engineering firms, a highly specialized project or a growing service area might require additional support. Since training a new recruit can be both costly and time-consuming, firms may take advantage of their international networks by transferring a skilled and experienced employee to their country.
In Canada, it can be challenging to navigate the complex tax environment for international employee assignments. Your firm needs the freedom to be able to bring in the right skill sets without worrying about getting entangled in payroll and income tax issues. And you don’t want the employee to be deterred from taking the job offer out of concern they will end up paying taxes in both their home country and Canada.
The following are some ideas about how you can help ensure a smoother transition for both the employee and the firm.
Resident or non-resident?
Canada has income tax treaties with various countries that provide provisions to clarify tax residency and income tax jurisdiction. These provisions help employees understand where they will be treated as a tax resident and how their income will be taxed in their home and host counties.
Canada also has social security totalization agreements with various countries. These let employees know which social security system they are obligated to pay into.
Let’s consider the fictional examples of two engineers, Fatima and Jefferson, who are both U.S. citizens and working in U.S. offices when your firm offers to bring their skills to Canada for one year.
Jefferson decides to leave his family in the U.S. and rent a small apartment in Canada, but he goes home on most weekends and fully intends to return there to stay after his year is up.
Fatima, on the other hand, decides to make a more firm commitment to working and living in Canada. She gives up the lease on her apartment in the U.S., buys a home in Canada and gets involved in her new community.
Under Canada’s domestic tax legislation, both Jefferson and Fatima would be considered tax residents of Canada, since they are in the country for more than 183 days in the calendar year. The Canada-U.S. tax treaty, however, can provide relief from double tax residency based on where an individual has stronger ties; this would affect how each of them would file their taxes in Canada, how their compensation and any other income would be taxed and how their situation would be reflected on their U.S. income tax return.
From a treaty point of view, Fatima would probably be considered a ‘deemed resident’ of Canada and thus subject to Canadian personal income tax on a worldwide basis. Jefferson, on the other hand, would probably be treated as a non-resident of Canada, so he would only pay Canadian personal income tax on his Canadian source income.
Since they are both U.S. citizens, they would still be treated as U.S. tax residents, subject to U.S. personal tax on their worldwide income. However, the treaty also allows them to claim a foreign tax credit on their U.S. return for the Canadian tax paid, which alleviates double taxation (though it is important to note not all states follow the treaty).
Your firm, meanwhile, would likely still be required to make payroll deductions for both Fatima and Jefferson, just as it does for all Canadian-based employees on its staff.
A checklist for international employment
Here are items you should review before you bring international employees to work in Canada:
Foreign employees may need to be set up on a Canadian payroll and thus be subject to Canadian payroll source deductions. The requirements apply regardless of the amount of time the foreign employee is physically working in Canada, but some of the payroll obligations may be reduced with the use of a waiver.
Income tax withholding and other payroll deductions
Canadian payroll source deductions include federal and provincial income tax, the Canada Pension Plan (CPP) and Employment Insurance (EI). As mentioned, some of these deductions may be reduced with the use of a waiver.
Provincial payroll registrations and costs
The employer may have to register with a particular province and pay additional provincial payroll costs, such as provincial health tax, workers compensation, etc. These programs and associated costs vary among provinces.
Individual income tax
The foreign employee may be subject to individual taxation on employment income they receive while working in Canada. Thus, they may be required to file a Canadian individual income tax return.
Tax number registrations
The employer and employee may have to apply for Canadian taxation account numbers to facilitate their compliance requirements.
The foreign employee may require a work permit to be legally allowed to work in Canada.
Setting up a tax equalization policy
You may need to work with your firm’s HR and accounting departments to develop a policy regarding bringing in employees from outside the country. This policy could involve providing incentives to encourage the employee to take an assignment in Canada and/or covering any additional tax expenses that employee may face.
The goal of such a policy is to keep the employee “whole,” so they will experience no advantage or disadvantage by coming to Canada to work. This may also involve documenting exactly who pays what.
To prepare the policy, you may need the support of tax professionals who are familiar with cross-border employee situations, including those relating to local tax regulations.
And once the policy is in place, you will be in a much better position—whenever the need and opportunity arise—to tell your clients, “Yes, we can provide the specialized skills to complete your project.”
Frank Casciaro, CPA, CGA, is senior manager and tax lead for global employer services with RSM Canada. For more information, visit rsmcanada.com.
Disclaimer: The contents of this article are intended as information only and should not be relied upon for advice. For advice on your particular situation, consult a qualified professional.
Sidebar: Non-Canadian firms
There are also tax implications for non-Canadian firms sending their employees to work in Canada:
For an organization based outside Canada that sends employees to work in Canada, even if it has no other presence in the country, it may be deemed to be carrying on business in Canada. Therefore, the employer may be required to file a return for and pay Canadian corporate tax on their net income earned here.
The employer could also be subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST). They may need to charge and collect the tax on revenues earned in Canada, file a GST/HST return and remit it.