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]
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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).
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
