Tax implications for Canadian employees working abroad

Tax Implications for Employees

To understand the taxpayer’s responsibilities we must first determine their residency for tax purposes. In other words, will the employee remain a tax resident of Canada or will they become a resident of the US? To answer this question, we must consult the tax treaty between Canada and the US. 

Normally, the taxpayer will be subject to tax on worldwide income in the country in which he/she is a tax resident. They will also be subject to tax in the other country for income earned in that foreign country. 

Let’s assume that the employee will remain a resident of Canada while working in the US. In this case, the employee will be subject to Canadian tax on their worldwide income and they will be subject to US taxation on income earned in the US. As such, the employee will be required to file a non-resident tax return (i.e.: 1040NR) in the US to report his/her US earnings and pay tax accordingly. Further, they will be required to file a resident tax return in Canada and be subject to Canadian tax on their worldwide income (including income earned in the US). To avoid double taxation, Canadian tax laws allows taxpayers to claim a Foreign Tax Credit (FTC) equal to foreign tax paid. In our example, the Canadian employee will claim the foreign tax paid on their US tax return as an FTC on their Canadian tax return.

As a Canadian employee working outside Canada, it is important to have an understanding of your tax filing responsibilities and which countries you have filing responsibilities to. By planning ahead, you will remain in compliance with all tax laws and avoid the headaches associated with dealing with tax authorities.

Tax Implications for Employers

Payroll obligations

Employment income is generally taxable in the country in which it is earned. As such, the employer must prepare the appropriate income slip and withhold payroll taxes. For instance, if a Canadian resident works in the US, income earned the US will be first taxable in the US. The employer will be required to issue a W-2 (equivalent of the T4 in Canada) for income earned in the US and withhold payroll taxes, including social security benefits. On the other hand, for a US resident working in Canada, the employer must issue a T4 slip to report income earned in Canada and taxes withheld.

Note that there are arrangements between Canada and the US to avoid having to withhold social security benefits in both countries. The employer can file for relief from double withholdings by applying for a Certificate of Coverage. 

It is imperative that the employer understands payroll withholding requirements for the country in which the employee is located, as there are penalties and interests for failing to meet these obligations. 

Corporate taxation

There are corporate tax implications of having employees situated in foreign countries. A business may be liable for corporate tax liabilities and filing requirements if it is considered to have a permanent establishment in a country. A business may be considered to have a permanent establishment if it is said to be carrying on business in that country. A business will be considered to be carrying on business in any place it has employees located for an extended period. 

For example, if a Canadian employer sends an employee to work in the US for a period greater than 6 months in any 12 month period, the employer will be considered to be carrying on business and have a permanent establishment. As such, the employer may be required to file a corporate tax return in the US and be subject to US tax on incomes earned in the US.

Therefore, it is critical for employers to understand their tax compliance obligations in the countries in which they have employees. By planning ahead, you can minimize tax responsibilities and liabilities and avoid nasty surprises.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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