In our previous article, Canadian payroll obligations for foreign employees working in Canada, we discussed how one of the biggest challenges for foreign employers is how to ensure Canadian payroll compliance for their foreign employees working in Canada. It is the foreign employer’s responsibility to administer a Canadian payroll, deduct Canadian payroll source deductions including income tax and Canadian social security from the foreign employee’s Canadian-source wages, and remit to the Canada Revenue Agency.
The Canadian source deductions are based on several factors including the province of employment, provisional tax withholding rules and regulations, and whether the foreign employee reports to a Canadian permanent establishment or not. There are possible exemptions from some of the above-mentioned Canadian payroll obligations under a tax treaty for income tax and a totalization agreement for social security.
For income tax, if the foreign employee is exempt from Canadian tax under a tax treaty between Canada and the foreign employee’s country of residence, this exemption can also be utilized to reduce or alleviate the Canadian payroll obligations by applying for one of the payroll waivers available as follows:
- Form RC473: This is an employer-based waiver that gives two-year blanket coverage for all of their foreign employees who come to Canada. If any foreign employee either works in Canada for less than 45 days in the calendar year or are present in Canada for less than 90 days in any 12-month period, Canadian payroll tax withholding is not required. The requirement to issue the T4 form still exists with the waiver, unless the foreign employee covered under this waiver earned less than CA$10,000 of Canadian source employment income for the same period.
- Regulation 102 waiver: This is an employee-based waiver that provides coverage on a calendar year basis. The foreign employee would apply for this waiver when the RC473 is not applicable to them but they are still exempt from Canadian taxation under a tax treaty. This waiver exempts Canadian payroll withholding only and the requirement to issue the T4 form still exists with the waiver.
For social security, which includes the Canada Pension Plan (CPP), Canada has totalization agreements with many countries that outline which social security system the foreign employee (and foreign employer) is required to pay into. Most of these totalization agreements follow the same rules, which indicate that if the foreign employee is physically working in Canada for no more than five years for the foreign employer, they both would be exempt from paying into the CPP. In order to claim this exemption, the foreign employer would need to apply for a certificate of coverage from the foreign employee’s country of residence.
Lastly, the exemption for Employment Insurance (EI) is governed by the Employment Insurance Act. It states that if the foreign employee is subject to unemployment insurance in their own country of residence, they will be exempt from contributing to EI in Canada. Also, there is no certificate required.
Knowing the possible exemptions that can be employed will help the foreign employer manage their Canadian payroll obligations and can help reduce their costs of having foreign employees in Canada. This might allow them to be more competitive in the Canadian market.
