Category Archives: Cross-border transactions

CANADIAN EXPATS CAN RECEIVE SALARIES FROM CANADA TAX FREE

Often, a Canadian expat will continue to receive salary payments from a Canadian corporation (“Canco”) after he or she ceases to be a Canadian resident for tax purposes.

This can apply to a situation where the sole shareholder of Canco emigrates and still continues to operate Canco. It can also apply to a situation where an arm’s length employee is transferred abroad, or just decides to move and continues in the job remotely.

I am always amazed at how many accountants think that such salary payments are subject to Canadian tax, and should be reported on a Canadian tax return.

Rarely would that be the case. As a general rule, a non-resident employee of a Canadian corporation would only be subject to Canadian tax on salaries for work done in Canada[1].

The only common exceptions would be:

  • If the work was done outside of Canada, but the recipient was still resident in Canada at the time the services were provided[2], or
  • The individual was entitled to an exemption from taxation in his country of residence as a result of a tax treaty between that country and Canada[3]

A recent CRA technical interpretation confirms the fact that generally, salaries paid by Cancos to non-resident employees are not subject to Canadian tax, and no payroll withholding is required[4].

Interestingly, the CRA stated (italics added)

“In the situation you presented, the individual in question would not attend any meetings or perform any functions in Canada. Where the participation in meetings would occur from outside of Canada using either the internet or the telephone, this would not, in our view, constitute the performance of services in Canada. As such, in the situation you presented, pursuant to subsection 104(2) of the Regulations, the corporation resident in Canada would not be required to make withholdings from the remuneration paid to the non-resident individual.”

However, the CRA maintains that Canco is still required to issue a T4 to the employee in such situations based on the wording of Regulation 200(1). One thing that the CRA does not mention in the technical interpretation is the fact that, in such situations, Canco should complete Box 10 of the T4 Supplement to clearly indicate that the services were performed outside of Canada[5]-this should lessen the chance of any inquiry from or disputes with the CRA.

In cases where the employee does periodically visit Canada to provide services, a portion of the salary, applicable to the work done in Canada may be taxable and subject to Canadian withholding tax. In those cases, two T4s should be prepared-one for the portion of the salary applicable to work done outside of Canada, and the other for the portion applicable to work done in Canada[6].

Regardless of whether or not the salary is subject to Canadian tax, it should generally be deductible in computing Canco’s income. However, if a salary paid to an expat, who is the controlling shareholder of Canco, is unreasonably high, the CRA could well disallow anything paid beyond a reasonable amount[7], and treat the excess portion as a deemed dividend that is subject to tax under Part XIII of the Act[8].

[1] Subparagraph 115(1)(a)(i) of the Income Tax Act (“the Act”). Of course, it is possible that the employee may be subject to tax on the salary in his or her new country of residence.

[2] Ibid.

[3] Paragraph 115(2)(c) of the Act

[4] CRA Document 2016-0677351E5

[5] Either coding it as “US” or “ZZ”

[6] Page 9 of CRA T4 Guide (Form RC 4120) states: “If you had an employee who had more than one province or territory of employment during the year, prepare a separate T4 slip for the earnings and deductions that apply to each province or territory”. Presumably, the same should apply here.

[7] Either under general provisions of the Act (Section 67; paragraph 18(1)(a)) or the application of the “transfer pricing” rules in subsection 247(2).

[8] See subsection 15(1) and, as well as 247(12).

TRUMP CORPORATE TAX CUTS COULD TRIGGER CANADIAN TAX ON DIVIDENDS FROM U.S. SUBS

Shhhh! There is a dirty little secret that not many people know or talk about. A large percentage of U.S. subsidiaries (“Usco”) of Canadian companies (“Canco”) are actually resident in Canada based on traditional rules for determination corporate residency that are mainly derived from UK tax cases. This is because their “central management and control”… Continue Reading

HOW CANADIAN COMPANIES CAN USE EXEMPT SURPLUS TO REDUCE TAXABLE GAINS ON SALE OF FOREIGN SUBSIDIARIES

Envision the following situation: Canco, a private corporate based in Ontario, has just gotten an offer to buy its wholly-owned U.S. subsidiary (“Usco”) for $10 million US. This is far more that the management of Canco thought it was really worth, so they jump at the offer. They ask Joe Numbers, their VP Finance to… Continue Reading

TRUMP’S CORPORATE TAX PROPOSAL MAY HAVE FAPI CONSEQUENCES FOR CANADIANS

Donald Trump’s proposal to lower U.S. federal corporate tax rates to 15% will be welcome news for Canadians who are shareholders of a profitable U.S. corporation (“Usco”). However, in certain cases, the Canada Revenue Agency will have its hands outstretched for a piece of the tax savings. In cases where Usco is a “controlled foreign… Continue Reading

NEW TAX TREATY BETWEEN CANADA AND ISRAEL CLOSES LITTLE-KNOWN LOOPHOLE

On September 23, 2016, I got an email from the Ministry of Finance announcing a new tax treaty between Canada and Israel. The actual posting on the Ministry’s website contained the following statement: “A new Convention between the Government of Canada and the Government of the State of Israel for the Avoidance of Double Taxation… Continue Reading

CANADIAN CORPORATIONS DOING BUSINESS IN U.S. VIA LLCs FACE BIG TAX PENALTY!

A Canadian corporation (“Canco”) which earns profits from carrying on business in the U.S. through a “permanent establishment” (“PE”) there will generally be subject to US federal taxes on its income derived from that PE. In addition to the normal federal income taxes on that income, as well as possibly state taxes, there is the… Continue Reading

BIG CANADIAN TAX HIT CAN RESULT FROM SALE OF CERTAIN PARTNERSHIP INTERESTS TO FOREIGN BUYERS

Many types of businesses (including the ownership of real estate) are structured as partnership. The partners can be individuals, corporations or even other partnerships. If the interest in the partnership is sold, then normally a capital gain or loss will result from the disposition of the partnership. It is well established that an interest in… Continue Reading

CANADIAN TAX ISSUES WITH ALIMONY PAYMENTS TO AND FROM NON-RESIDENTS

Under the Income Tax Act (“the Act”) alimony[1] paid by a separated or divorced spouse will generally be deductible in computing income of a Canadian resident. This assumes that it is paid pursuant to a written agreement or court order, and paid as an “allowance” on a periodic basis. Similarly, a Canadian resident recipient of… Continue Reading

CANADIANS CAN DEDUCT US TAX PAID RE LLCs EVEN IF NO INCOME REPORTED

As a general rule, a Canadian resident can claim of credit against his/her/its Canadian income tax liability for foreign income taxes paid (“foreign tax credit”-“FTC”). The rules relating to claiming FTCs are generally found in section 126 of the Income Tax Act (“the Act”). Unless the foreign tax is related to a business carried on… Continue Reading

CANADIANS WITH FOREIGN REAL ESTATE CORPORATIONS CAN FACE SURPRISING FAPI ISSUES

A Canadian resident who is a shareholder of a “controlled foreign affiliate” (“CFA”) will have special Canadian tax issues if that CFA earns “foreign accrual property income” (“FAPI”). Any corporation that is not resident in Canada (“Forco”) will be a CFA of a particular Canadian resident if it is controlled by that Canadian resident.  However,… Continue Reading