Taxes are not simple for remote work
Ah, the dream of working from the beach! We’ve all been there, especially in the dark days of the Canadian winter. Recent years have seen an increased trend to remote work arrangements for several reasons. Employers get to support employees in the never-ending pursuit of work-life-balance by giving back their commuting hours. The technology is there to accomplish this for certain industries. Yet, complexity arises when it comes to taxation as remote work may trigger an international tax exposure.
Our practice regularly deals with remote workers for Canadian and US employers, especially from the neighboring country. Not a big deal, right? WRONG!!!
The CRA roundtable at the 2023 IFA Annual Conference addressed the remote work arrangements specifically for US resident employers with Canadian resident workers. The question assumes a US resident corporation (US Employer) hires an employee who will be partially working remotely from Canada. The CRA’s reply was as expected…status quo. Translation – it’s complicated! Although not binding, an explicit position would have provided more reassurance and prevented unnecessary risk to each participant.
There are two issues which US Employer must consider. First is whether US Employer is “carrying on business” in Canada through their Canadian employees working remotely. Why is this important? Because the CRA may have the right to tax the business profits of US Employer if it is indeed carrying on business in Canada. Does it mean the US employer is exposed to double taxation? Well, there is the United States – Canada Income Tax Convention (1989), also is known as the tax Treaty, which provides relief from double tax, but you have to understand what the employee is doing while working remotely in Canada for US Employer and each situation is dependent on the facts surrounding the business and the employee.
Second is everyone’s favorite topic – payroll! The majority of remote work arrangements result in the Canadian employee being put on US payroll. While US Employer is correct that there is likely an employee-employer relationship, they are offside with Canadian and US payroll reporting obligations which extends to income taxes, social security taxes, unemployment insurance premiums, etc. Administering payroll in the wrong jurisdiction could be costly as penalties typically start at 10% of the unpaid/unremitted tax. US Employer better get ready because a payroll audit is likely just around the corner.
The employee is set up in their Canadian home office and gets paid every two weeks in USD! What could possibly be wrong with that? Cash flow is one problem. US Employer is withholding US taxes from remote worker’s pay, but the worker is not working in the US, they are working in Canada. The CRA is expecting periodic payroll remittances but gets nothing. April rolls around and it is time to file the personal Canadian tax return. As the employee is a resident of Canada, they are taxed by the CRA on their worldwide income. The employee owes 30-40% of their gross income to the CRA…by April 30th! They file a US tax return to get the taxes withheld refunded, but who knows when the refund will be issued as the IRS is not fond of refunding the entire income tax withheld at source without further inquiries or an accurate explanation on the filed return The CRA is also asking to pay quarterly instalments too! There’s nothing left after the taxes are deducted in the US and instalments are paid to Canada. Oh, and we can’t forget the state income tax withholding, depending on the state where remote worker is assigned.
Remote work has benefits, otherwise it wouldn’t be gaining popularity. However, it is important that the arrangements are carefully prepared and followed. The company may inadvertently trigger Canadian corporate income tax exposure, while the employee scrambles to pay their personal taxes on time. And what about the social security taxes? Where will remote worker be eligible for social security or employment insurance benefits? The situation is complicated further if the employee works in both countries as payroll withholding is required based on where the employment duties are rendered.
If you have remote workers or you are yourself a remote worker, contact us to find out how we can help with your tax compliance obligations.