Canadian payroll obligations for foreign employees working in Canada
INSIGHT ARTICLE |
One of the biggest challenges foreign employers are facing is how to ensure payroll compliance in Canada for their foreign employees who are sent to work in Canada. Foreign employers may presume that if they are compliant in their home country, there is no additional payroll compliance requirement in Canada. Employers may also assume that employees who travel to Canada for business meetings, conferences or training, or who work fewer than a certain number of days in Canada, are not subject to tax in Canada, and thus there is no payroll obligation.
However, foreign employers should understand that sending even one employee to work in Canada triggers a payroll obligation. Compliance starts from the first day of the foreign employee’s physical presence in Canada. As per the Canada Revenue Agency (CRA), it is the employer’s responsibility to set the foreign employee up on a Canadian payroll, deduct Canadian income taxes and Canadian social security taxes (Canadian Pension Plan and Employment Insurance) from the employee’s Canadian-source wages, and remit to the CRA on time. The employer must also remit, out of pocket, a matching contribution on the social security taxes, and issue a Canadian wage slip (Form T4) for the foreign employee at year-end. To facilitate these obligations, the foreign employer and employee are required to obtain a Canadian Business Number (BN), and Canadian Social Insurance Number (SIN), respectively.
Currently, CRA is increasing the frequency of payroll audits, which can result in increased payroll noncompliance risks for more and more foreign employers. It is important to note that the CRA can pursue the foreign employer for the payroll taxes not remitted, plus interest and penalties, in the event of noncompliance. This can be a significant cost if the foreign employer has sent multiple employees over a number of years to work in Canada and has historically been unaware of payroll obligations.
With COVID-19, employees can now work virtually from wherever they wish and employers are not restricted to their home country when searching for talent. However, employees on virtual assignments or hired to work from their home in other countries may also create Canadian payroll issues.
There may be an exemption from some of the above-mentioned Canadian payroll obligations, if the foreign employee is exempt from Canadian taxation under a tax treaty between Canada and the foreign employee’s country of residence. The foreign employer needs to apply for a payroll waiver from CRA to rely on these exemptions. These waivers must be applied for in advance of the foreign employee arriving in Canada to be effective. There are different waiver applications based on the length of time the employee is physically working in Canada.
There are also exemptions from having to contribute to the CPP and EI, including in respect of the employer’s share, depending on agreement between Canada and the foreign home country and certain criteria of employee’s home country.
In most cases, employers are already investing significant time and internal resources to send an employee on an international assignment. Employers will want to keep abreast of Canadian payroll tax obligations to minimize unnecessary compliance costs.
Our Global Employer Services (GES) practice has put together a list of items that should be reviewed to ensure a smoother transition.