Beginning June 30, 2014, Canada and the U.S. implemented a new joint initiative to share information with each other about when individuals cross a Canada-U.S. border. The new cross-border initiative enables Canada and the U.S. to accurately track the number of days that employees and contractors who are residents of one country spend in the other country in a calendar year. In Canada, this information could highlight a Regulation 102 withholding (remission of employee source deductions such as income tax, CPP, EI) issue for employers as well as a Regulation 105 withholding (remission of withholding tax applicable to any services performed in Canada other than as an employee) issue for payors of such service fees.
Canada imposes withholding tax obligations on non-resident employers as well as Canadian resident employers who pay for employment services performed in Canada. If the employee is not a Canadian resident, Regulation 102 withholding applies to remuneration reasonably attributable to any time spent in Canada as an employee (other than on vacation or attending qualifying conferences). If the employee is a Canadian resident, Regulation 102 applies to all of the employee’s remuneration.
A separate Canadian withholding tax obligation applies where a U.S. resident (corporation or individual other than an employee) receives a fee (or pays a fee to a non-resident) in respect of services performed in Canada. The payer of the fee is required to withhold and remit to the CRA 15% of the gross amount of the fee (even if only a part of it related to services in Canada) as Regulation 105 withholding. Where this withholding has not been done, the CRA may be able to assess the payer for not withholding since the new initiative enables tracking of the service provider’s movements cross-border.
There are waivers that may be available from both the Regulation 102 and 105 withholding described above. These waivers are the only exemptions from the withholding obligation (there is no de minimus threshold) and they must be obtained prior to payment for the services.