2022-0947251E5 Withholding on Payment to Non-Resident Employees

Principal Issues: 1. Whether subsection 104(2) of the Income Tax Regulations requires a corporation resident in Canada to withhold income tax from a payment to a non-resident employee for services performed outside Canada where the payment is remuneration that falls within the exception described in subparagraph 115(2)(e)(i) of the Income Tax Act and is paid to a non-resident person who has in the year, or had in any previous year, ceased to be resident in Canada. 2. Whether an information return is required to be filed in the described circumstances.

Position: 1. No withholding is required. 2. The payor (Canadian resident corporation) is require to issue T4 Supplementary Slips and Summary Forms.

Reasons: 1. No withholding is required where a non-resident does not perform duties of employment inside Canada and is subject to tax in country of residence pursuant to subsection 104(2) of the Income Tax Regulations. 2. Subsection 200(1) of the Regulations requires preparation of T4 where salary, wages or other remuneration is paid.

Author: Godson, Gillian
Section: 115(2)(e)(i) and 153(1) of the Income Tax Act; 101, 102 to 103.1, 104(2) and 200(1) of the

XXXXXXXXXX                                                                         2022-094725
                                                                                                 Mei Ng

March 13, 2023

Dear XXXXXXXXXX:

Re: Withholding and Reporting on Payment to Non-Resident Employees

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”) or the Income Tax Regulations (“Regulations”), as amended to the date hereof.

This is in reply to your emails dated August 7, October 27 and November 29, 2022 in which you requested a technical interpretation regarding the following hypothetical situation:

* A Canadian corporation, resident in Canada has only one employee, to whom it pays employment income monthly.

* The employee is a non-resident of Canada, not physically in Canada and not working in Canada.

* The employee is a former Canadian resident, ceased to be resident in a previous year and is subject to tax on the employment income in his country of residence.

* The employment income received by the employee is the type of remuneration referred to in the phrase “salary, wages or other remuneration” in paragraph 153(1)(a) of the Act.

* The employee receives remuneration from the employer for duties of employment performed outside Canada.

In light of the above facts, you asked the following questions:

1. Whether a corporation resident in Canada is required under Regulation 104(2) to withhold income tax from a payment to a non-resident employee for services performed outside Canada, if the payment falls within the exception in subparagraph 115(2)(e)(i) of the Act?

2. Is payroll reporting to CRA required for this employee? Regulation 200(1) seems to require it. And if so, is it a T4 or an NR4?

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

Our comments

With respect to your first question, we provide the following comments.

Paragraph 153(1)(a) of the Act requires every person paying salary, wages or other remuneration to withhold prescribed amounts therefrom, subject to exceptions. The amounts to be withheld are prescribed by the Regulations.

Regulation 101 requires every person who makes a payment described in subsection 153(1) of the Act to withhold from the payment an amount, if any, as determined in accordance with Part I of the Regulations. The amounts to be withheld, if any, are prescribed in Regulations 102 to 103.1.

Regulation 104(2) allows for an exception to the withholding requirement provided by Regulations 102 to 103.1. This exception provides that no amount is required to be withheld from a payment where an employee was neither employed nor resident in Canada at the time of the payment of the remuneration.

However, the exception provided by Regulation 104(2) to the withholding requirement does not apply if either of paragraph 104(2)(a) or (b) applies. Paragraph 104(2)(a) applies if the amount paid is remuneration described in subparagraph 115(2)(e)(i) of the Act and is paid to a non-resident person who has in the year, or had in any previous year, ceased to be resident in Canada. Paragraph 104(2)(b) applies if the remuneration is reasonably attributable to the duties of employment performed in Canada by the non-resident person.

For the purposes of determining the application of paragraph 104(2)(a), the remuneration must be an amount described in subparagraph 115(2)(e)(i) of the Act, which provides that the remuneration is in respect of duties of employment paid to a non-resident person by a resident of Canada, except to the extent that the amount is attributable to duties of employment performed by the non-resident outside Canada and is:

(a) subject to an income or profits tax by a government of a country other than Canada; or

(b) is paid in connection with the selling of property, the negotiating of contracts or the rendering of services, in the ordinary course of business carried on by the employer, a foreign affiliate of the employer or a person with whom the employer does not deal at arm’s length.

In the hypothetical situation described to us, the remuneration paid by the employer resident in Canada to the non-resident employee is not remuneration described in subparagraph 115(2)(e)(i) of the Act since the remuneration is attributable to duties of employment performed outside Canada and is subject to tax in the non-resident employee’s country of residence.

Therefore, neither of the conditions in paragraph 104(2)(a) nor (b) of the Regulations applies in the hypothetical circumstances you have described. Accordingly, the employer would not be required to withhold from the remuneration paid to the employee pursuant to Regulation 104(2).

In regards to your second question, Regulation 200(1) requires every person who makes a payment described in subsection 153(1) of the Act to make a return in prescribed form. The requirement in Regulation 200(1) is not conditional upon the payee being taxable in Canada or the payor being required to withhold from the payments to the payee.

The payment to the non-resident employee in the hypothetical situation you have described is the type of remuneration described in paragraph 153(1)(a) of the Act. Therefore, the employer would be required to make a T4 information return pursuant to Regulation 200(1) in respect of the non-resident employee’s total remuneration.

However, it would be at the employer’s discretion to prepare the T4 supplementary slip for remuneration for less than $500 on which no deductions were made. This is in accordance with the RC4120, Employers’ Guide – Filing the T4 Slip and Summary which is available on our website at RC4120 Employers’ Guide – Filing the T4 Slip and Summary.

We hope our comments are of assistance.

Yours truly,

Gillian Godson
A/Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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