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International income tax issues: CRA and COVID-19

Guidance on international income tax issues raised by the COVID-19 crisis

The COVID-19 crisis has resulted in the imposition of safety measures by governments around the world, including the Canadian government, to protect the health of their citizens. Similarly, businesses have imposed safety measures to protect their employees. These measures include travel restrictions. The travel restrictions have resulted in certain taxpayers and their representatives expressing concerns about a number of potential Canadian income tax issues. This document describes each potential issue considered by the Canada Revenue Agency (the CRA) thus far, and outlines the agency's approach to address the issue.

Some of these income tax issues will arise from the travel restrictions instituted by another country and not those of Canada. As well, in some situations, particular travel restrictions could have effect past the date on which the restrictions are officially lifted. Therefore, the CRA will consider whether a particular tax issue has arisen as the result of the travel restrictions, on a case by case basis. The guidance described below (except for sending international waivers and notifications for certificates of compliance) will apply from March 16 until September 30, 2020, at which time the CRA does not anticipate further extensions of the guidance.

The administrative approach taken by the CRA in addressing these issues is intended to help taxpayers during this time of crisis. The approach does not represent any interpretive position or intention to establish any broader policy by the CRA. Nor does it represent any change in Canada's ongoing commitment to fight international tax evasion and avoidance. Any taxpayer that engages in tax evasion or avoidance schemes that try to exploit the crisis or the temporary measures discussed below can expect the CRA to use all its compliance tools to protect the integrity of Canada's tax system.

I. Income tax residency

I. Income tax residency
  1. Individuals

    In general, an individual's residence for Canadian tax purposes is a common-law factual determination based on the individual's residential ties to Canada. In addition, an individual who temporarily stays (is physically present) in Canada for a period of, or periods that total 183 days or more in a tax year will be deemed to be resident in Canada throughout the year.

    Potential Issue

    Individuals visiting Canada when the travel restrictions were imposed may not have been able to return to their country of tax residence as they intended and instead had to stay in Canada. Could this extended stay in Canada result in the individual being resident in Canada for Canadian tax purposes?

    Agency position

    If an individual stayed in Canada only because of the travel restrictions, that factor alone will not cause the CRA to consider the common-law factual test of residency to be met. Also, as an administrative matter and in light of the extraordinary circumstances, the CRA will not consider the days during which an individual is present in Canada and is unable to return to their country of residence solely as a result of the travel restrictions to count towards the 183-day limit for deemed residency. This will be the CRA position where, among other things, the individual is usually a resident of another country and intends to return, and does in fact return, to their country of residence as soon as they are able to.

  2. Corporations

    Under the Canadian income tax system, corporations that have been established under foreign law are nevertheless considered resident in Canada if their central management and control is located in Canada. One of the key factors typically considered in applying this common-law concept is the jurisdiction in which the meetings of the board of directors take place.

    Potential Issue

    A corporation that, before the implementation of the travel restrictions, was tax resident in a foreign jurisdiction may have one or more directors present in Canada. The travel restrictions might have resulted in these directors being unable to travel to the foreign jurisdiction to attend board meetings. If directors of such a corporation participate in board meetings while physically present in Canada, will the CRA consider the corporation's central management and control to be in Canada, such that it is resident in Canada for Canadian tax purposes and therefore a dual resident (that is, a resident of Canada and a resident of the foreign jurisdiction)?

    Agency Position

    Some of Canada's income tax treaties will address the situation of the dual residency of a corporation by determining the corporation to be resident in the country under whose laws it was created. For example, if the corporation is an entity created under the laws of the United States as a C-corporation or S-corporation, the CRA expects that the corporate residency tiebreaker rule contained in Article IV of the Canada-United States income tax treaty will address this issue.

    Other tax treaties contain a residency tiebreaker rule that looks to the corporation's place of effective management, among other factors. For corporations covered by such income tax treaties, in light of the extraordinary circumstances resulting from the travel restrictions, as an administrative matter, where a director of a corporation must participate in a board meeting from Canada because of the travel restrictions, the CRA will not consider the corporation to become resident in Canada solely for that reason.

    Determinations of corporate residency involving potential dual residency with non-treaty countries will be determined on a case by case basis.

    This administrative approach will also be followed in respect of other entities established in foreign jurisdictions that are considered corporations under Canadian income tax law, such as limited liability companies. In addition, where appropriate, the CRA will consider adopting a similar approach in determining the residency of a commercial trust. Finally, the CRA will also adopt a similar approach in determining the residence of a foreign affiliate of a Canadian corporation for surplus calculation purposes. In other words, where a director of a foreign affiliate that, before the travel restrictions, was resident in a country with which Canada has an income tax treaty, is unable to participate in board meetings because of the travel restrictions, the CRA will not consider the corporation to cease being resident in that country for surplus calculation purposes solely for that reason. Determinations of corporate residency involving foreign affiliates resident before the travel restrictions in non-treaty countries will be determined on a case by case basis.

    It is important to note that, notwithstanding that our comments above concentrate on the location of board meetings, there is more to where central management and control of a corporation, or where place of effective management (for income tax treaty purposes) is located than the location of board meetings. The determination of the central management and control of a corporation is based on a number of factors, of which the location of board meetings is only one element. Similarly, the location of board meetings is also only one element in determining the location of a corporation's place of effective management. The CRA may still conclude that a corporation is resident in Canada where the actual management and control of the corporation takes place in Canada, even though the board meetings have taken place elsewhere.

II. Carrying on business in Canada/Permanent establishment

II. Carrying on business in Canada/Permanent establishment

Under the Canadian income tax system, non-residents of Canada are liable to pay tax on their income from "carrying on business in Canada." In general, where Canada has entered into an income tax treaty with another country, a resident of that country will only have to pay tax in Canada on that income if their activities in Canada meet the threshold of a "permanent establishment" under the relevant income tax treaty.

Potential Issue

A non-resident entity may employ individuals to work outside of Canada. Due to the travel restrictions, the only way for some of these individuals to fulfil their employment duties might be by performing them in Canada. Will employees who regularly work outside of Canada but, due to the travel restrictions, exercise their employment duties in Canada result in the non-resident entity carrying on business in Canada or create a permanent establishment in Canada for the non-resident entity?

Agency Position

Non-resident entities that are resident in a jurisdiction with which Canada has an income tax treaty and that are carrying on business in Canada, but whose activities in Canada do not meet the threshold of permanent establishment, have to file a return for that year in order to claim an exemption from Canadian income tax. This filing obligation continues to apply for the tax years of non-resident entities that overlap with the period while the travel restrictions are in place. However, as an administrative matter and in light of the extraordinary circumstances resulting from the travel restrictions, the CRA will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their employment duties in Canada solely as a result of the travel restrictions being in force. Similarly, the CRA will not consider an "agency" permanent establishment to have been created for the non-resident entity solely due to a dependent agent concluding contracts in Canada on behalf of the non-resident entity, while the travel restrictions are in force, provided that such activities are limited to that period and would not have been performed in Canada but for the travel restrictions.

If Canada has not entered into an income tax treaty with the country in which the non-resident entity is resident, and if the non-resident entity carries on business in Canada, it is required to file a return for that year. If it can be demonstrated to the CRA that the non-resident entity has satisfied the Canadian income tax threshold of carrying on business in Canada only because of the travel restrictions, the CRA will consider whether administrative relief is appropriate on a case by case basis.

Finally, the CRA will exclude, in determining whether an individual meets the 183-day presence test in a "services-permanent–establishment" provision of Canada's tax treaties [such as article V(9)(a) of the Canada-United States income tax treaty], any days of physical presence in Canada due solely to the travel restrictions.

III. Cross-border employment income

III. Cross-border employment income

Many individuals residing on either side of the Canada-U.S. border may be employed and perform their employment duties in the other country.

  1. US Resident Employees

    Under the Canada-United States income tax treaty, Canada can tax salary, wages and other similar remuneration derived by a resident of the United States for employment services provided in Canada, if the employment is exercised in Canada. Notwithstanding the above rule, such remuneration is not taxable in Canada if either of the following apply:

    • The remuneration is not greater than CAN$10,000
    • The person is present in Canada for no more than 183 days in any 12-month period, starting or ending in the fiscal year concerned and the remuneration is not borne by either:

      • an employer who is a resident of Canada
      • a permanent establishment which the employer has in Canada

    A reciprocal rule applies for residents of Canada working in the United States.

    Potential Issue

    Some U.S. residents who regularly exercise their employment in Canada and who are normally not present in Canada in excess of 183 days (and, for that reason alone, are not taxable in Canada on their employment income) may now be exercising their duties in Canada for an extended period of time, as a result of the travel restrictions. In these situations, will the employees' taxation in Canada be changed?

    Agency Position

    If such individuals are present in Canada, and are exercising their employment duties in Canada solely as a result of the travel restrictions, those days will not be counted toward the 183-day test in the Canada-United States income tax treaty. As such, these individuals will continue to benefit from the treaty relief provided under the Canada-United States income tax treaty.

  2. Other resident employees

    The CRA will also take this approach in applying the days-of-presence test in Canada's other tax treaties.

  3. Canadian Resident Employees

    Under Canadian rules, a non-resident employer is required to deduct withholdings at source from the salary that it pays to an employee who is a resident of Canada, regardless where the services are rendered. Where appropriate, the Agency will issue a "letter of authority" to the employee authorizing the non-resident employer to reduce the Canadian deductions at source to take into account the foreign tax credit available to the employee in respect of their foreign tax liability.

    Potential Issue

    A non-resident entity may employ Canadian residents to work outside of Canada. As a result of the travel restrictions, the only way for some of these Canadian resident employees to fulfil their duties might be by performing them in Canada on an exceptional and temporary basis. Will the performance of employment duties from Canada affect the withholding obligations of the non-resident entity?

    Agency Position

    If a Canadian resident employee of a non-resident entity is forced to perform their employment duties in Canada on an exceptional and temporary basis as a result of the travel restrictions, and that employee has been issued a letter of authority applicable to the tax year including that period, the letter of authority will continue to apply and the withholding obligations of the non-resident entity will not change in Canada, as long as there are no changes to the withholding obligations of the non-resident entity in the other jurisdiction.

IV. Waiver Requests – Payments to non-residents for services provided in Canada

IV. Waiver Requests – Payments to non-residents for services provided in Canada

Canadian income tax rules require that amounts must be deducted or withheld and remitted in respect for:

  • payments to non-residents for services rendered in Canada , other than those paid in respect of an office or employment (regulation 105)
  • remuneration paid to a non-resident officer or employee in respect of an office, or employment services, provided in Canada (regulation 102)

In certain circumstances, an application to the CRA may be made for a waiver of the withholding requirement under regulation 105 or 102. Most often, this will be the case if a recipient is exempt from Canadian income tax in respect of a payment because of an income tax treaty that Canada has with the recipient's country of residence.

Potential Issue

As a result of the interruption and the travel restrictions, urgent waiver requests may be submitted electronically on a temporary basis.

A waiver request in respect of regulation 105 and/or102 has been sent to the CRA, and due to the interruption, the CRA was unable to process the request within 30 days, the CRA will not assess a person who fails to deduct, withhold or remit any amount as required by regulations 102 and 105, in respect of an amount paid to a non-resident person covered by the particular waiver request.

This relief will be available if the sole reason a non-resident person could not obtain a waiver of regulation 102 or 105 withholdings from the CRA was due to the interruption, and the person paying the amount can demonstrate they have taken reasonable steps to ascertain that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty with Canada. Both the non-resident and the person paying the amount must otherwise fulfil their Canadian reporting and remitting obligations in respect of the waiver application.

Other situations may arise where a waiver request could not be sent to the CRA due to the travel restrictions or other consequences of the COVID-19 crisis, and yet no amounts were withheld pursuant to regulations 102 and 105. The CRA will review these situations on a case by case basis to determine if the non-compliance can be directly attributed to the effects of the COVID-19 crisis. In those cases, the CRA will not assess a person who fails to deduct, withhold or remit any amount as required by regulations 102 and 105, in respect of an amount paid to a non-resident person.

V. Disposition of taxable Canadian property by non-residents of Canada

V. Disposition of taxable Canadian property by non-residents of Canada

Under Canadian income tax rules, a non-resident vendor who disposes of certain taxable Canadian property must notify the CRA about the disposition either before they dispose of the property or no later than 10 days after the disposition. When the CRA has received either an amount to cover the tax on any gain the vendor may realize on the disposition of property, or appropriate security for the tax, the CRA will issue a certificate of compliance to the vendor (a section 116 certificate). A copy of the certificate is also sent to the purchaser.

If the purchaser does not receive a section 116 certificate within 30 days of the end of the month in which the property was acquired, they have to remit a specified amount to the Receiver General for Canada and is entitled to deduct that amount from the purchase price. Any payments or security provided by the vendor or purchaser will be credited to the vendor's account. A final settlement of tax will be made when the CRA assesses the vendor's income tax return for the year.

Potential Issue

As a result of the COVID-19 crisis, the processing of requests for a section 116 certificate was temporarily interrupted. The CRA has continued to accept requests for these certificates during the interruption. However, processing times have been longer than usual. How should a vendor and a purchaser proceed?

Agency Position

If a vendor has submitted a request for a section 116 certificate, but the certificate has not been issued by the time a purchaser's remittance is due (that is, within 30 days of the end of the month in which the property was acquired), the buyer or vendor may ask the CRA for a comfort letter.

The comfort letter advises the purchaser/vendor/representative to retain the funds they have withheld (even though technically, the amounts are due) until the CRA's review is complete and the CRA asks the purchaser to remit the required tax. As long as the tax is remitted when requested, the CRA will not assess a penalty or interest on the amount.

As a result of the interruption, urgent requests for comfort letters may temporarily be submitted by email. A comfort letter may also be requested by contacting the CRA's individual tax enquiries line at 1-800-959-8281.

VI. Non-resident employer certification

VI. Non-resident employer certification

Non-resident employees providing employment services in Canada are subject to the same withholding, remitting, and reporting obligations as Canadian resident employees. Therefore, any employer, including a non-resident employer, has to withhold amounts on account of the income tax liability of an employee in Canada, even if the employee is likely to be exempt from tax in Canada because of a tax treaty. For the employer to be relieved of their obligation to withhold, the employee would have to apply for, and get, an income tax waiver from the CRA [as discussed in IV. Waiver requests – Payments to non-residents for services provided in Canada above].

However, there is an exception to the employer's withholding obligation for certain non-resident employers paying employment income to non-resident employees for performing the duties of an office or employment in Canada. These non-resident employers, who apply for and receive certification as a qualifying non-resident employer, will not have to withhold and remit tax on the payments they make to a qualifying non-resident employee who is working in Canada for a limited time and is exempt from tax in Canada under a tax treaty.

For more information, go to non-resident employer certification.

Potential Issue

An individual working in Canada as a qualifying non-resident employee when travel restrictions were imposed may not have been able to leave Canada as they had intended and instead had to stay in Canada. Could this extended stay in Canada result in the individual losing their status as a qualifying non-resident employee and obligate the qualifying non-resident employer to withhold and remit Canadian payroll deductions to the CRA on the employment income paid?

Agency Position

In light of the extraordinary circumstances, the CRA will not consider the days, during which a non-resident individual is working or present in Canada and cannot return to their country of residence due to the travel restrictions, to count towards the 45 days worked or the 90 days present in Canada for the definition of a qualifying non-resident employee. This will be the CRA position where it can reasonably be shown that the employer expected the employee to leave Canada before losing their status as a qualifying non-resident employee, and the employee returns to their country of residence as soon as they can.

To keep certification as a qualifying non-resident employer, the employer will track and document, among other things:

  • the days during which the qualifying non-resident employee is working or present in Canada and cannot return to their country of residence, due to travel restrictions
  • the employment income that corresponds to these days of work in Canada

For further guidance on international income tax issues

If a taxpayer has questions about how this guidance will apply, or if they have a situation that is not addressed above, or if their situation persists past September 30th, please contact [PERESCOVIDG@cra-arc.gc.ca].Footnote 1

How to obtain international waivers and certificates of compliance during the COVID-19 crisis

During the COVID-19 pandemic, the CRA is continuing to review international waivers (regulations 102 and 105, and Form RC473, Non-Resident Employer Certification) and requests for a certificate of compliance under section 116 (forms T2062 and T2062A, B, and C). However, processing times may be longer than usual. The following provides information about how to apply for international waivers and certificates of compliance during the COVID-19 crisis.

Persons entering Canada during the COVID-19 pandemic

The Government of Canada has made it mandatory for any person entering Canada to have a plan to quarantine for 14 days when they arrive in Canada. This plan is mandatory, even if the person has no symptoms.

When applying for a waiver, do not count the quarantine period as part of the days in Canada or the service period. This is consistent with the COVID-19 guidelines issued by the Organisation for Economic Co-operation and Development and the CRA.

Applying for an individual tax number

At this time, the CRA cannot process applications for an individual tax number (ITN) alongside a waiver application or request for certificate of compliance. Please apply for an ITN separately by completing Form T1261, Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents and following the mailing instructions on the form. Please tick the box indicating the reason you are asking for an ITN, because that will speed up the process.

If you have a new request or submission

Due to restrictions on mail operations, and until operations resume in full, the CRA may not be able to access any documents that were sent by mail or fax after March 12, 2020. You can still send your request and information by mail or fax, but there may be delays in processing. If your situation is, or becomes, urgent, please call 1-800-959-8281 or follow the instructions below to contact the CRA by email or send your documents electronically.

If you have already sent your documents

The CRA is continuing to process requests, but there may be delays. If your situation is urgent, send an email to the CRA at:

Do not include sensitive information or attachments in the email.

Send your documents electronically

As of June 19, 2020, you or your representative can send a request for an international waiver (regulations 102 and 105, Form RC473, Non-Resident Employer Certification) or a notification for a section 116 certificate of compliance (forms T2062, and T2062A, B, and C) online through My Account, Represent a Client or My Business Account. For more information go to: international waivers or certificates of compliance under section 116.

If you or your representative cannot use one of these portals, the CRA has created a temporary procedure allowing taxpayers and their representatives to electronically send the following:

  • urgent requests for an international waiver (regulations 102 and 105, and Form RC473 waiver requests)
  • urgent requests for a certificate of compliance under section 116 (forms T2062, and T2062A, B, and C)
  • supporting information for requests

How to send your documents by email

  1. If you cannot use My Account, My Business Account, or Represent a Client to send your request for an international waiver or a certificate of compliance under section 116, send an email, stating that you want to correspond by email with the CRA for a request or enquiry to:

    Do not include sensitive information or attachments in your email.

  2. Wait for a CRA officer to respond to your email. The officer will send you the requirements to authorize communication by email and tell you when/if you may send an application or request by email.

    Note
    There are risks involved in sending sensitive and personal information by email. The CRA is temporarily allowing applications and requests to be sent by email as an emergency measure to help stop the spread of COVID-19.

  3. For resubmissions, please include the date you originally sent your application or request.

    Note
    Applications that are not complete will delay processing.

History

This section identifies any amendments made to the guidance.

Original issue date – May 19, 2020.

Update – June 29, 2020

The application of the guidance was extended from March 16, 2020 - June 29, 2020 to March 16, 2020 - August 31, 2020.

Update – August 31, 2020

The application of the guidance was extended from March 16, 2020 - June 29, 2020 to March 16, 2020 - September 30, 2020.

Update – September 2, 2020

Section I.-B. has been updated to address a possible issue with corporate residency requirements as it relates to the surplus calculations of a foreign affiliate of a Canadian-resident corporation.

Section VI. has been added to address a possible issue for non-resident employers whose non-resident employees may have had to remain in Canada for an extended period as the result of the travel restrictions.

The guidance has been updated generally solely to make it more readable and consistent with existing government writing style. None of these changes indicate a change in policy or approach of the CRA in applying the guidance.

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