In response to COVID-19, countries have imposed health measures and travel restrictions (“Travel Restrictions”) to keep the global community safe. In doing so, concerns were raised regarding how these restrictions could potentially cause unforeseen tax issues for some businesses and taxpayers. The Canada Revenue Agency (“CRA”) has provided guidance on potential issues businesses may encounter during COVID-19 to assist taxpayers during this time of crisis.
It should be noted that the CRA will assess whether tax issues have arisen as a result of the Travel Restrictions on a case-by-case basis. At the present time, it is uncertain how long it will be necessary for the Travel Restrictions to remain in place. The following guidance described below is applicable from March 16 to June 29, 2020, at which time the CRA may extend if deemed necessary, or rescind if no longer required.
Income Tax Residency
Individuals
Current Rule  |
Issue  |
CRA's Position  |
|
An individual who sojourns in Canada for 183 days or more in aggregate in a tax year will be deemed to be resident in Canada throughout the year. |
Could the extended stay in Canada due to Travel Restrictions result in the individual being resident in Canada for tax purposes? | Those unable to return to their country of residence due to Travel Restrictions will not have those days count towards the 183-day limit for deemed residency. CRA will also look at whether an individual is a tax resident of another country and actually returns as soon as he/she is able to do so. |
Corporations
| Current Rule |
Issue |
CRA's Issue |
| A foreign corporation could be considered resident in Canada if their "central management and control" is located in Canada which is generally dictated by the location of Board of Director meetings. | Would restrictions on travel of directors for board meetings and attendance of them while physically in Canada lead to the company’s central management and control to be in Canada? | Board meetings are just one factor in determining “central management and control” of an organization and the location of board meetings are just one element in determining the location of a corporation’s place of effective management. The CRA may use other factors to determine if a corporation is a tax resident of Canada. |
Carrying on Business in Canada/Permanent Establishment
| Current Rule |
Issue |
CRA's Position |
| Non-residents are liable to pay tax in Canada on the income they earn through carrying on business in Canada. However, tax treaty benefits can be available to limit the taxation on this income to the extent the activities in Canada do not meet the threshold of a "permanent establishment" (PE) as per the relevant income tax treaty. | Will the employees who normally work outside of Canada but perform duties in Canada due to Travel Restrictions result in the non-resident employer carrying on business in Canada or create a PE? |
The CRA will not consider a non-resident employer to have a PE in Canada simply because its employees perform their employment duties in Canada as a result of Travel Restrictions. In addition, the CRA will not consider an “agency” PE to exist as a result of a dependent agent concluding a contract in Canada on behalf of the non-resident entity as long as these activities are limited to the travel restriction period and would not have been performed but for the travel restrictions. Where a non-resident of a country, with which Canada does not have a treaty, carries on business in Canada, it is required to file a return for that year. However, if it can demonstrate to the CRA that the “carrying on business” threshold was reached only because of the travel restrictions, the CRA will consider providing administrative relief on a case-by-case basis. When determining whether an individual meets the 183-day presence test in a "services permanent establishment" provision of Canada's tax treaties, the CRA will exclude the days of physical presence in Canada due solely to Travel Restrictions. |
Cross-Border Employment Income
U.S./Foreign Resident Employees
| Current Rule |
Issue |
CRA's Position |
| Tax treaties provide exemption from taxation of employment income for non-residents in the source country provided certain conditions are met including, physical presence in Canada being less than 183 days in aggregate in a 12-month rolling period. | Could the extended stay in Canada due to Travel Restrictions result in loss of treaty exemption? | Those unable to return to their country of residence due to Travel Restrictions will not have those days count towards the 183-day test for treaty exemption purposes and will continue to be eligible for the relief. |
Canadian Resident Employees
| Current Rule |
Issue |
CRA's Position |
| A non-resident employer is required to deduct payroll withholdings from Canadian resident employees regardless where the services are rendered. A "letter of authority" issued by the CRA can be used to reduce such deductions for anticipated foreign tax credit when duties are performed outside Canada. | Due to Travel Restrictions, Canadian resident employees who were hired to perform services outside Canada may need to do so in Canada. Will this affect the withholding obligations of the non-resident entity where a letter of authority was obtained on the premise of the foreign tax credit? | In this case, if the employment duties are performed in Canada on an exceptional and temporary basis as a result of the Travel Restrictions and a letter of authority was issued, it 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. |
Waiver Request: Payments to Non-Residents for Services Provided in Canada
| Current Rule |
Issue |
CRA's Position |
| Non-residents who receive payments for services they render in Canada or receive remunerations in respect of office or employment services rendered in Canada, are generally subject to income tax withholdings in Canada under Regulation 105 or Regulation 102 respectively. However, non-residents exempt from paying Canadian income tax on these amounts may apply for a waiver of the Regulation 105 or 102 withholding tax (“Waiver Request”). Without a valid waiver, a payor must withhold the necessary income tax. | If CRA has not processed the Waiver Request within 30 days of submission, how should the payor proceed? Is the payor required to withhold the Regulation 105 or 102 withholdings from payments to non-residents? |
If a Waiver Request was submitted but, due to interruptions resulting from the COVID-19 crisis, the CRA was unable to process this waiver within 30 days, the CRA will not assess a person who fails to withhold or remit amounts required by Regulation 105 or Regulation 102 in respect of that particular Waiver Request. Urgent Waiver Requests can be submitted electronically on a temporary basis. |
Disposition of Taxable Canadian Property by Non-Residents of Canada
| Current Rule |
Issue |
CRA's Position |
| Sale of Canadian property by a non-resident is subject to a 25% withholding on gross basis unless a clearance certificate (“Section 116 Certificate”) is obtained by the seller in advance. | How should a seller and purchaser proceed due to delays in processing of requests for a Section 116 Certificate which has been impacted by COVID-19 related interruptions? | Where a request for Section 116 Certificate is outstanding until the due date for remittance, one may request a comfort letter which will put suspension on remittance until the review by CRA is completed. Urgent requests for comfort letters may be submitted by email on a temporary basis or by contacting CRA at 1-800-959-8281. |
Contact our international tax team for a personalized plan in navigating your international income tax issues.
For more information regarding international income tax issues please refer to the CRA’s website.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
