Canada’s New Blanket Withholding Waiver for Non-Resident Employees

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March 1, 2016

A legislative amendment in Canada’s 2015 federal budget is providing some U.S. employers and employees much needed relief.  The amendment provides a blanket waiver for non-resident employers who otherwise would have to withhold from the wages of non-resident employees, including those ultimately entitled to full refunds.  The new waiver will eliminate a process by which many non-resident employees faced withholding and then had to file a return to claim a full refund.

Before 2016, a non-resident employer in Canada was required to withhold and remit taxes from compensation paid to an employee for work performed in Canada, even if the employee is a non-resident person exempt from Canadian income tax under a tax treaty. To get a refund, the non-resident employee was then required to file a Canadian income tax return and claim the treaty exemption.  Alternatively, a non-resident employee could have applied for a waiver from wage withholding—and point to the applicable treaty exemption—30 days before either the employment services began in Canada or when the initial payment was made for the services. But this per-employee waiver is administratively burdensome.

After 2015, however, a new blanket waiver valid for up to two years is available to qualifying non-resident employers paying qualifying non-resident employees.  To be certified as a qualified non-resident employer, an employer must file a Form RC473, Application for Non-Resident Employer Certification with the Canada Revenue Agency, 30 days before the first payment.  The employer must show that, at the time of the payment, it is resident in a country that Canada has a tax treaty with and it is certified by the Minister of National Revenue.  Additionally, an employer must agree that the employer will:

  1. Evaluate and document how its employee meets the definition of a qualifying non-resident employee at the time of any employment payment by (a) monitoring the employee’s qualification status on an ongoing basis; (b) obtaining documentation proving the employee’s country of residence; and (c) ensuring that the tax treaty between the employee’s resident country and Canada is applicable;
  2. Track and document the number of days the qualifying non-resident employee is working in Canada or is present in Canada, and the employment income that corresponds to these days;
  3. Keep a business number (or use Form RC1, Request for a Business Number, to get a business number if the employer does not yet have one) and register a program account number for payroll purposes if the employer expects to make remittances;
  4. Prepare and file a T4 slip and a T4 Summary for the non-resident employee who has provided employment services in Canada that are not excluded from reporting under proposed subsection 200(1.1) of the Income Tax Regulations;
  5. Complete and file Canadian income tax returns for calendar years covered by the certification period; and
  6. Render its books and records available for CRA inspection.

A qualifying non-resident employee is an employee that (a) is a resident in a country that Canada has a tax treaty with at the time of the payment; (b) owes no tax in Canada on the payment because of the tax treaty; and (c) works in Canada for less than 45 days in the calendar year that includes the time of the payment, or is present in Canada less than 90 days in any 12-month period that includes the time of the payment.

Although the new blanket waiver may lessen a non-resident employer’s administrative burdens, the employer must carefully comply with the conditions of certification.  The CRA may revoke a certification if the non-resident employer violates any of the conditions, rendering the employer liable for the whole amount that should have been withheld and remitted and subject to related penalties and interest.