Category Archives: Nonresident taxation

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).

WEALTHY IMMIGRANTS TO CANADA SHOULD CONSIDER FOREIGN OWNERSHIP OF CANCOS

Many wealthy (as well as not so wealthy) immigrants to Canada will establish very successful Canadian corporations (“Cancos”) that will ultimately become extremely valuable. In many cases, those immigrants to Canada will still have family abroad, and might be happy to have equity interests in Canco owned by those family members. In such cases, there… 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

NON-RESIDENTS INVESTING IN CANADIAN REAL ESTATE CAN CUT TAXES ON CAPITAL GAINS BY PROPER USE OF FORCO

In this troubled, chaotic world we are living in, Canada remains a politically and financially stable locale that is an attractive destination for foreign investment. I have little doubt that, in the years ahead, investment in Canadian real estate by non-residents will continue to be quite substantial. Over the years, I have found that most… 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

CANADIAN NON-RESIDENT WITHHOLDING TAX ISSUES IN CONNECTION WITH PAYMENTS TO PARTNERSHIPS

Tax under Part XIII of the Income Tax Act (“the Act”) applies to many types of payments received by non-residents of Canada from Canadian residents[1]. Most commonly this can apply to dividends paid by Canadian corporations; royalties paid by Canadians for the use of property in Canada; rents paid by Canadians for the use of… Continue Reading

CANADA’S “THIN CAPITALIZATION” RULES-AN OVERVIEW

Like many other countries, Canada’s Income Tax Act (“the Act”) contains rules aimed at limiting the ability of foreign shareholders of a Canadian corporation (“Canco”) to reduce the taxable income of Canco by interest charges. These rules, which are commonly called “thin capitalization” rules, are found in subsections 18(4) through 18(8) of the Act. The… Continue Reading

CANADIAN TAX ISSUES WITH CROSS-BORDER GUARANTEE FEES

In situations where a foreign parent company (“Forco”) guarantees a debt of a Canadian subsidiary company (“Canco”) a fee may be charged for the provision of that guarantee. This would be particularly sensible for a tax planning perspective if Forco is subject to a lower rate of tax on its income than Canco. In addition,… Continue Reading