Telework arrangements: Employer payroll deductions and updated CRA guidance – employee rights/industrial relations

On January 1, 2024, a new Canada Revenue Agency (“CRA“) administrative policy shall enter into force to determine the employee’s province of employment (“)POE“) for purposes of employer payroll deductions. Please refer to the updated administrative policy here. In particular, this new policy provides updated guidance in determining an employee’s POE when a full-time telecommuting arrangement is in place for the employee. In an environment where traditional office employment is evolving, this new policy will help Canadian resident and non-resident employers understand their withholding obligations in Canada.

Remote work access to POE

The amount of payroll deductions an employer is required to withhold usually depends on the employee’s POE, although the employee’s final tax liability depends on the province of residence. A POE for an employee is generally where the employee “reports to work at the employer’s establishment”.1

However, if the employee is not required to report in person to work at the employer’s establishment and the remuneration paid to the employee is a salary, wage or commission, the employee’s POE for purposes of the employer’s source deduction and contribution is generally the province where the employer’s establishment “from which the employee’s salary and wages are paid “.2 In light of past administrative guidance, this will usually be the location of the employer’s payroll department or payroll or the establishment that actually bears the cost. An “employer” for these purposes and for the purposes of the withholding tax rules is generally considered to be the person paying the salary or remuneration.3

We have previously published an overview of the tax impact of telecommuting in Canada with regard to whether an employee’s home office constitutes an employer’s “place of business”. here. In principle, the employee’s home office will be considered the employer’s place of business if the employee is authorized to enter into contracts on behalf of the company from his home, or if the employee holds and sells inventory of the employer’s goods from his home. office. Otherwise, the home office is not normally considered a place of business of the employer.

Updated CRA guidance

For employees resident in Canada, the updated guidance states that an employee is considered to be reporting to work at an employer’s establishment if one of the following conditions applies:

  1. If there is a full-time telework arrangement, the employee can reasonably be considered to be “attached to the employer’s establishment”; gold

  2. The employee reports to work physically at the establishment, in which case there is no minimum period for which the employee must report to this location.

The new CRA guidance addresses the first test and states that it must be established whether a full-time telework arrangement is in place. In general, a CRA will consider a full-time telecommuting arrangement if the following arrangements are made:

  • The agreement is either temporary or permanent;

  • The employer directs or allows the employee to perform full-time remote work duties; and

  • The employee performs work duties at one or more locations that are not the employer’s premises.

If the above factors are met indicating that a full-time telecommuting arrangement exists, it must be determined whether the employee is reasonably considered to be “attached to the employer’s establishment.” The primary indicator for determining this test is whether, but for the full-time telecommuting agreement, the employee would physically come to work to perform functions related to his job duties at a specific employer’s establishment. A number of secondary indicators can help in determining whether an employee performs functions related to his job duties at a specific employer’s establishment:

  • The employee would participate in face-to-face meetings through any type of communication at this facility;

  • The employee receives or would receive work materials or equipment or related instruction and assistance at that facility;

  • The employee receives or would receive instructions from his employer regarding his duties through any type of communication at this facility;

  • The employee would be supervised, as specified in the contractual arrangements between the employer and the employee, from this establishment; gold

  • The employee would report to this establishment based on the nature of the duties that the employee performs.

In general, all of the above indicators should be reviewed together to determine whether an employee is reasonably considered to be “attached to the employer’s establishment.”

As indicated above, as the wage rules (for income tax purposes) consider the payer of remuneration to be an “employer”, the employer for wage purposes may be different from the actual statutory employer. Therefore, there may be circumstances where it will be difficult to apply the above factors. The updated CRA policy states that if an employee works in Canada but does not report to work (never physically and is not considered part of the new CRA administrative policy) at the employer’s establishment, the previous rules will apply (i.e, the POE will be the province or territory where the employer’s establishment is located from which the employee’s wages are paid). We also note that the CRA guidance in place prior to the recent update was based on legislative provisions Income Tax Regulations (Canada) and the CRA’s interpretation of relevant provisions. At the time of publication, Income Tax Regulations (Canada) have not been updated to reflect this policy change.

Non-resident employers

The move towards more remote work opportunities has opened up opportunities for non-resident employers to employ people located anywhere in the world. However, the ease of telecommuting may frustrate some employers because the relevant payroll deductions must still be calculated based on the employee’s place of employment in the jurisdiction from which they work. In determining the appropriate payroll deductions, the first issue is determining whether the non-resident employer has a place of business in Canada. In certain circumstances, a non-resident employer may wish to employ remote Canadian employees directly; alternatively, the non-resident employer may establish a Canadian subsidiary through which the employees will be employed.

Non-resident employer, Canadian establishment

A non-resident employer may wish to employ Canadian resident employees and may choose to do so by creating a Canadian subsidiary through which it employs Canadian employees. In some cases, this subsidiary may take the form of a physical office with staff to provide instructions, supplies, and supervision to remote employees. If Canadian permanent employees are working under a full-time telework arrangement under this scenario, the updated CRA guidance would indicate that the remote employee is reasonably connected to that employer’s establishment.

In other cases, a non-resident employer can only establish a subsidiary in Canada with no physical establishment attached. If Canadian permanent employees are working under a full-time telework agreement under this scenario, the determination of the employee’s POE will revert to whether the subsidiary operates its payroll and records through the Canadian subsidiary. If so, the province in which the subsidiary was incorporated should act as the employer’s place of business for purposes of determining the employee’s POE.

Non-resident employer, without establishment

If a non-resident employer has no place of business in Canada (including no physical office and no registered Canadian subsidiary) but employs remote Canadian employees, the nature of the employment is deemed to be located in Canada but above the tax limits of any province or area. In such a case, the employer must use the payroll deduction tables for “In Canada beyond any province/territory or outside Canada” provided that here establish appropriate deductions from employee wages; these are organized according to the relevant frequency of pay periods. The employee will then have to approve the applicable provincial income tax and other deductions on the tax return.

Employees of Quebec

Where the POE is Québec, withholdings and employer contributions for provincial purposes must be made in accordance with Québec rules and sent to Revenu Québec. The Quebec rules are largely harmonized with the federal rules. However, we note that, as of the date of publication, Revenu Québec has not indicated whether it would harmonize its own administrative position with the newly updated CRA guidelines.

footnote

1. The provisions of § 102 paragraph 1 letter Income Tax Regulations (Canada) (“ITR“).

2. § 100 paragraph 4 letter a) ITR. According to paragraph 100 paragraph 4 letter (b) the POE, in respect of remuneration other than salary, wages or commissions, shall generally be deemed to be the province of residence of the employee.

3. Definition of “employer” in sub-section 100(1) ITR.

The content of this article is intended to provide a general guide to the issue. Professional advice should be sought regarding your particular situation.

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