Non-residents of Canada for tax purposes are only taxed on their Canadian income
Canadian tax residents are taxed based on their worldwide income. However, non-residents for Canadian tax purposes (which is a different test then immigration purposes) are only liable for Canadian tax on their Canadian source income such as employment, office, business and passive income, or disposition of taxable Canadian property. Under Part XIII of the Income Tax Act, a non-resident of Canada is generally subject to a flat tax rate of 25%, but the rate may be reduced pursuant to a tax treaty. Still, under certain conditions, Canadian expats may not be subject to any withholding tax. This article will focus on these conditions and clarify the employer's obligation to issue T4 returns to non-resident employees.
Non-resident employees who are not employed in Canada are generally exempt from Canadian withholding tax
Under subsection 104(2) of the Income Tax Regulations, a Canadian employer generally has no obligation to withhold tax on payments to non-resident employees who were not employed in Canada except in the following situations:
- The payments meet the condition under subparagraph 115(2)(e)(i) of the Income Tax Act that is say paid to a non-resident person who has in the year of payment, or had in any previous year, ceased to be a Canadian resident for tax purposes, or
- The payments are reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person.
Subparagraph 115(2)(e)(i) of the Income Tax Act exempts certain salary payments to non-residents for work outside Canada
The payments under subparagraph 115(2)(e)(i) of the Income Tax Act are defined as any remuneration in respect of an office or employment that was paid to the non-resident person directly or indirectly by a person resident in Canada and was received by the non-resident person in the year, except to the extent that the remuneration is attributable to the duties of an office or employment performed by the non-resident person anywhere outside Canada and
- is subject to an income or profits tax imposed by the government of a country other than Canada, or
- is paid in connection with the selling of property, the negotiating of contracts or the rendering of services for the non-resident person's employer, or a foreign affiliate of the employer, or any other person with whom the employer does not deal at arm's length, in the ordinary course of a business carried on by the employer, that foreign affiliate or that person.
The exception set out under A exempts salary payments that are also taxed in a foreign country, while B refers to salaries paid in the ordinary course of the business carried on by the employer. In other words, payments that are either subject to foreign tax or made in the ordinary course of the business are exempt from withholding tax.
The employer may still be required to issue a T4 to the non-resident employee
Under subsection 200(1) of the Income Tax Regulation, every person who makes a payment described in subsection 153(1) of the Income Tax Act is required to make a return in the prescribed form (T4). This is not conditional upon the payee being taxable in Canada or the payor being required to withhold from the payments to the payee. So, a Canadian employer is required to issue a T4 slip for every employee and to prepare and submit a T4 summary to CRA.
Pro tax tips – payments to non-resident employee may not be taxable
In summary, employment payments made to a non-resident employee are not subject to withholding tax if the payments are subject to foreign tax or are made in the ordinary course of the business carried on by the employer. However, the individual should first confirm his/her residence status for tax purposes by consulting with an experienced Canadian tax lawyer.
FAQ:
When will a non-resident employee of Canada be exempt from withholding tax on his/her employment payments?
Employment payments made to a non-resident employee are not subject to withholding tax if the payment is subject to foreign tax or made in the ordinary course of the business carried on by the employer.
Is an employer still required to issue T4 to non-resident employees for services provided outside Canada?
Every person who makes a payment described in subsection 153(1) of the Income Tax Act must issue a T4 regardless of the employer's obligation to withhold tax.
