On May 19, 2020 the CRA published administrative relief (found here) for taxpayers who might otherwise be facing Canadian tax residency or cross-border issues as a result of travel restrictions imposed in light of the COVID-19 crisis. Certain potential tax issues and the CRA’s temporary approaches to each are summarized below. The guidance published by the CRA was initially set to apply from March 16, 2020 until June 29, 2020, but the end date has been extended to at least August 31, 2020.
Note, this post has been updated to include further public statements made by the CRA regarding waivers and clearance certificates (see our Tax Alert on those updates here).
Income Tax Residency for Individuals
Generally, at common law the determination of whether an individual is resident in Canada is a question of fact, based on all relevant factors, including an individual’s residential ties to Canada. In addition, under paragraph 250(1)(a) of the Income Tax Act (Canada) (the “ITA”), an individual who sojourns in Canada for a period of 183 days or more during a taxation year is deemed to be resident in Canada throughout that year.
The CRA recognizes that individuals who were present in Canada at the time that travel restrictions were imposed may have been unable to return to their country of tax residence. Accordingly, the CRA accepts that where an individual has remained in Canada solely because of travel restrictions, that factor alone will not suffice to satisfy the common-law test of residency. Furthermore, the CRA will not count days during which an individual is present in Canada and unable to return to their country of residence solely as a result of travel restrictions towards the 183-day limit for deemed residency. The CRA will take this position where an individual is usually a resident of another country to which he/she intends to return, and in fact does return to that country as soon as travel is possible.
Income Tax Residency for Corporations
Aside from certain deeming rules in the ITA, the residency of a corporation for Canadian income tax purposes is determined by reference to the common-law concept of “central management and control”. Generally, a determination of residency under the common law relates to the place where the corporation’s central mind and management resides, usually where the board of directors holds their meetings and decisions are made.
Some of Canada’s tax treaties (for example, the Canada-US Tax Treaty) contain a residency tie-breaker rule that will deem a corporation that is resident in both countries under the common law to be a resident of the country under whose laws it was created. Where this type of tie-breaker rule applies, travel restrictions caused by COVID-19 are less likely to cause issues.
Under other tax treaties (for example, the Canada-UK Tax Treaty), the determination of residency of corporations considers the place of management and other factors. Where a director of a corporation governed by such a tax treaty must participate in a meeting from Canada as a result of travel restrictions, the CRA stated that it will not consider the corporation to become resident in Canada solely for that reason.
Other corporations may be resident in a country that does not have a tax treaty with Canada. The CRA stated that questions of dual-residency for such corporations will be “determined on a case-by-case basis.” The CRA’s statement on these situations appears to provide little comfort.
The CRA has announced that this approach will be followed in respect of entities established in foreign jurisdictions that are considered corporations for Canadian income tax purposes, such as limited liability companies. Furthermore, the CRA will consider adopting a similar approach when determining the residency of commercial trusts.
A non-resident that carries on business in Canada is required to file a tax return in Canada and is liable to pay tax on income earned in Canada. However, Canada’s tax treaties generally provide that the business income of a non-resident is subject to Canadian income tax only to the extent that such income is attributable to a “permanent establishment” of the non-resident in Canada. Where a non-resident is carrying on business through a Canadian employee or agent, it may be considered to have a permanent establishment in Canada.
There may be circumstances in which individuals who normally perform their employment duties outside Canada must perform them inside Canada as a result of travel restrictions. In this regard, the CRA stated that it will not consider a non-resident entity to have a permanent establishment in Canada for the purposes of tax treaties solely because its employees perform their employment duties in Canada strictly as a result of travel restrictions. Further, the CRA will not consider a non-resident entity to have a permanent establishment in Canada for the purposes of tax treaties solely due to a dependent agent concluding contracts in Canada while travel restrictions are in force, provided that such activities would not have been performed in Canada but for the travel restrictions.
If an entity is resident in a country with which Canada does not have a tax treaty and has satisfied the threshold of “carrying on business in Canada” solely because of the travel restrictions, the CRA will consider whether administrative relief is appropriate on a case-by-case basis.
Employment Income Earned by Non-Residents Employees
Article XV(2) of the Canada-US Tax Treaty provides that, where certain conditions are met, employment income earned by a resident of the US in respect of temporary employment exercised in Canada is exempt from taxation. One of those conditions is that the employee not be present in Canada for 183 days or more in any 12-month period.
The CRA accepts that where a US resident that exercises employment duties in Canada is present in Canada solely as a result of travel restrictions, those days will not count towards the 183-day test for purposes of Article XV(2) of the Canada-US Tax Treaty. Accordingly, such individuals will continue to benefit from the treaty relief (to the extent that all other requirements are met).
The CRA will take the same approach when applying Canada’s tax treaties with other countries.
Employment Income Earned by Canadian Resident Employees from Non-Resident Employers
Generally, non-resident employers are required to withhold income tax from the salaries of Canadian-resident employees. In certain circumstances, the CRA will issue a “letter of authority” to the employee authorizing a non-resident employer to reduce the Canadian source deductions to account for foreign tax credits that may be available to the employee.
The CRA has confirmed that if an employee is temporarily forced to perform his/her employment duties in Canada as a result of travel restrictions, and that employee has already been issued a letter of authority for the applicable taxation year, then the letter of authority will continue to apply and the withholding obligations of the non-resident employer will not change in Canada (provided there are no changes to the withholding obigations of the non-resident entity in the other jurisdiction).
Payments to Non-Residents of Canada for Services Provided in Canada
Payors (whether resident or non-resident) are required to withhold income tax at source from fees paid to non-residents in respect of services rendered in Canada (under Regulation 105), and remuneration for officer or employee services provided in Canada (under Regulation 102). A payor that does not withhold and remit when required under these provisions is liable for the unwithheld tax, plus interest and penalties.
However, the non-resident may ultimately be exempt from Canadian tax on the payment, or be subject to less Canadian tax than the applicable rate of withholding tax, usually by operation of a tax treaty. In such situations, the CRA may issue a waiver allowing the payor not to withhold tax, or to withhold at a reduced rate.
As a result of COVID-19, the processing of waiver requests was interrupted, and processing times have been slower than usual. The CRA is temporarily accepting urgent waiver requests submitted electronically. See our Tax Alert on that process here.
The CRA has also provided that where a waiver request was submitted and was not processed within 30 days as a result of COVID-19, the CRA will not assess a person who fails to withhold or remit in respect of an amount paid to a non-resident person that is the subject of the particular waiver request. This relief will be available where the only reason that a non-resident person did not obtain a waiver from the CRA was due to their temporary interruption resulting from COVID-19, and the payor can demonstrate that they took reasonable steps to ascertain that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax as a result of a tax treaty.
Other situations may arise where waiver requests could not be submitted on time because of travel restrictions or other consequences of COVID-19. In such situations, where payors did not withhold income tax at source, the CRA will consider whether the non-compliance is directly attributable to COVID-19, and where it is, will not assess a payor for failure to withhold or remit an amount.
Dispositions of Taxable Canadian Property by Non-Residents
A non-resident who disposes of taxable Canadian property must, among other things, notify the CRA of the disposition under section 116 of the ITA.. Upon receipt of the notice and the appropriate tax or security, the CRA may issue a certificate of compliance (a “Section 116 Certificate”) to the vendor. If no Section 116 Certificate is obtained within 30 days after the end of the month of the sale, the purchaser of the property is required to withhold and remit a portion of the purchase price to the Receiver General of Canada.
In many cases, obtaining a Section 116 Certificate by that deadline is not possible. Practically, the vendor often requests that the CRA issue a comfort letter advising the purchaser to retain the withheld funds until the CRA’s review is complete. These comfort letters typically provide that as long as the tax is remitted when requested, no penalties or interest will be assessed.
As a result of COVID-19, the CRA’s processing of Section 116 Certificates and comfort letters was temporarily interrupted. That processing has resumed, but only in a limited capacity. In our experience, this has caused significant difficulties for many taxpayers.
The CRA has now said that urgent requests for comfort letters may be submitted on a temporary basis by email (at NRDISPOG@cra-arc.gc.ca) or by contacting the CRA’s individual tax enquiries line at 1-800-959-8281. See our Tax Alert on that process here.
Given the already high volume of calls to that hotline, one might question the utility of the CRA’s approach. Permitting taxpayers who have made a comfort letter request, and who retain the withheld funds, to act as if the comfort letter had been issued (until CRA has time to officially process the request) – similar to the CRA’s approach to Regulation 102 and 105 waivers – may have been more beneficial.