Tax Implications of Sending U.S. Citizens to Work in Canada

What are the tax implications for sending US Citizens to Work in Canada? This is a loaded question and the cross border tax implications are complex. In this blog, I will highlight the most important ones.

1) According to regulation 102 of the Canadian income tax act, an American employer that sends US employees to work in Canada must withhold Canadian payroll taxes. Canadian payroll taxes are comprised of Canadian income taxes, CPP, and employment insurance premiums.

2) Canadian payroll taxes are only levied on Canadian employment services physically performed in Canada. As an employer, it is important to keep track of the employees days spent working in Canada as this will affect the amount of Canadian payroll taxes to be deducted from their paycheques.

3) As a foreign employer, you must register for a Canadian business number and issue Canadian employment slips called T4s to your employees each year in Canada. T4s are very similar to the American W2 slips.

4) A cash flow problem will almost certainly arise for your employees if you don’t take certain actions. The problem arises because payroll taxes are being deducted twice. First for Canadian payroll taxes then again for US payroll taxes. This leads to a very angry employee with little after-tax cash from their paycheques. In order to reduce the US payroll taxes and alleviate this double tax problem, complete Form W4.

5) Your employees are probably already resentful for being shipped to the cold Canadian north, but what’s even worse is that they have to contribute to the US social security system and the CPP. To avoid paying CPP, you should obtain a certificate of coverage from the social security administration.

So Here’s the Tip:
Before sending your employees to work in Canada, consider the tax implications from the US and Canadian perspective, as well as consult with a cross border tax accountant to help you.

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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