On June 30, 2014, officials with the Canada Border Services Agency and the U.S. Department of Homeland Security commenced a cross-border information exchange initiative, whereby certain information on individuals crossing the border will now be shared between the countries' border officials. Included in this shared information will be biographical data and the number of days spent in each country, which may be used by each country's governmental departments to ensure compliance with, among other things, income tax, immigration and health care regulations.
With respect to income tax rules impacting U.S. individuals and businesses working and/or operating in Canada, it stands to reason that the shared border-crossing information may be used by the Canada Revenue Agency (CRA) to ensure compliance with the relevant withholding tax obligations discussed below.
1. Regulation 105
Under Regulation 105 of the Income Tax Act (Canada), anyone paying an amount to U.S. persons (individual or corporate) for the rendering of services in Canada is required to withhold and remit 15 per cent of that amount to the CRA. If the services were rendered in the province of Quebec, an additional 9 per cent must be withheld and remitted to the Minister of Revenue of Quebec.
The requisite withholding discussed above represents a payment on account of the U.S. person's Canadian income tax liability. Where the U.S. person can demonstrate that their actual Canadian income tax liability is less than the amount withheld (such as by claiming protection under the Canada-U.S. Tax Treaty), they may obtain a reduction of the withholdings by filing for a waiver. Otherwise, a refund of withholding taxes may be obtained by filing a treaty-based tax return.
Due to the new cross-border information exchange initiative, the CRA may be able to track the movements of U.S. persons entering Canada to render services and verify if the 15 per cent withholding under Regulation 105 has been completed. The CRA may assess penalties and interest to the Canadian payor when its obligations under Regulation 105 have not been met.
2. Regulation 102
If a U.S. employer has U.S. employees working in Canada, Regulation 102 of the Income Tax Act requires them to withhold payroll source deductions from the employees' paycheques with respect to their time spent working in Canada unless a waiver is obtained from the CRA. The requisite withholdings are the same deductions that the U.S. employer must address for its Canadian resident employees: income taxes, Canada Pension Plan contributions and Employment Insurance premiums (though the latter two may be eliminated altogether, depending upon the specific facts, in the case of U.S. employees).
The cross-border information exchange initiative may allow the CRA to track the number of days that U.S. employees spend in Canada working and, therefore, track the employer's obligations under Regulation 102. In addition to the employer burden, each U.S. resident employee may be required to file a Canadian individual income tax return, depending on the circumstances.
If applicable, and if you have not met the rules under Regulations 102 and/or 105 for prior years (including filing the requisite tax returns), you may be able to catch up on late filings under the CRA's Voluntary Disclosures Program (VDP). Provided certain conditions are satisfied, the VDP allows taxpayers to meet their obligations for up to the 10 most recent fiscal years while avoiding the associated penalties.
If you purchase non-resident services rendered in Canada, or you are a non-resident operating in Canada, we strongly recommend that you consult a Collins Barrow tax professional to ensure compliance with these rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
