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A State of Change - August 2016

Published on: Aug 29, 2016

TurtleIn this issue

Proposed Legislation to Implement 2016 Federal Budget

Sending employees on business to Canada? Non-resident employer certification to simplify matters

 

Introduction

This issue of our newsletter provides several updates on tax matters relevant to the not-for-profit sector. Our first article covers Bill C-15, Budget Implementation Act, 2016, No. 1, which was released to implement proposals within the 2016 Federal Budget. Our second article relates to the non-resident employer certification process for payroll taxes, and is of relevance to foreign organizations which send employees to Canada. If your not-for-profit organization operates internationally or has chapters which are incorporated in other jurisdictions, this new certification process may impact you.

Proposed Legislation to Implement 2016 Federal Budget

On April 20, 2016, the Federal government released Bill C-15, Budget Implementation Act, 2016, No. 1 to implement proposals contained in the Budget 2016. The following proposals included in Bill C-15 are of particular importance for Charities.

Investments in limited partnerships

New subsection 253.1(2) is added to permit registered charities and registered Canadian amateur athletic associations (RCAAA) to hold an interest as a limited partner in a limited partnership, provided certain conditions are met. Registered charities and RCAAAs will not be considered, solely because of their acquisition or holding of the limited partnership interest, to carry on any business or other activity of the partnership if certain conditions are met. This rule applies for the purposes of section 149.1 (which provides the rules that must be met for charities to obtain and maintain their registered status) and subsections 188.1(1) and (2) (which, in general terms, determine the tax liability of a registered charity in respect of the revocation of the charity’s registration). The specific conditions that must be met for the provision to apply are:

  • by operation of any law governing the arrangement in respect of the partnership, the liability of the registered charity or RCAAA as a member of the partnership must be limited;
  • the registered charity or RCAAA must deal at arm’s length with each general partner of the partnership; and
  • the registered charity or RCAAA, or the registered charity or RCAAA together with persons and partnerships with which it does not deal at arm’s length, cannot hold interests in the partnership that have a fair market value of more than 20% of the fair market value of the interests of all members of the partnership.

In essence, the limited partnership interest would be treated as an investment by the registered charity or RCAAA, rather than as their carrying on of the underlying activities of the partnership which may not be permitted by a registered charity or RCAAA.

This amendment applies in respect of investments in limited partnerships that are made or acquired after April 20, 2015.

Donations – value of consideration

New section 164 of the Act provides rules that, subject to certain conditions, result in reducing the GST/HST tax otherwise payable in respect of a taxable supply of property or a service made by a charity or a public institution to a donor where the value of the donation exceeds the value of the property or service. The GST/HST would not be payable on the portion of the donation in excess of the value of the property or services supplied. Previously GST/HST would have applied to the entire value of the donation.

Two conditions must be met. The first condition is that the value of the property or service supplied by the charity or public institution to the donor be included in determining the amount of the advantage in respect of a gift by the donor to the charity or public institution for purposes of “split-receipting rules”. The second condition that must be met is that a receipt complying with tax requirements of the Income Tax Act may be issued, or could be issued, if the donor were an individual.

New section 164 generally applies to any supply made after March 22, 2016.

Sending employees on business to Canada? Non-resident employer certification to simplify matters

An open talent economy brings opportunity in the garb of distinct challenges. While organizations strive to work effectively across borders, tax and payroll challenges need to be managed efficiently. Canada’s withholding tax rules require employers to withhold, remit and report taxes on the salary paid to business travelers to Canada. In today’s fluid global economy these regulations were bordering archaic, and thus, non-resident employer certification process was introduced, effective January 2016.

Well received by international business community, this new process allows foreign companies sending employees to Canada for short business trips, to obtain certification from the Canada Revenue Agency (‘CRA’) to be relieved of withholding requirements in certain circumstances. As envisaged, this is a significant step in reducing the tax compliance burden for non-resident companies with limited employee activity in Canada. This process benefits not only foreign companies, but also Canadian companies which have set up international subsidiaries that are considered non-resident entities for Canadian tax purposes.

Eligibility

An employer who is a non-resident of Canada and tax resident of a country with which Canada has a tax treaty, can apply for certification. However, the certification is in respect of payments made to those qualified non-resident employees who are tax treaty exempt and do not exceed the prescribed maximum presence ‘days’ test in Canada.

Once certified by the Minister, the qualified non-resident employer is not required to withhold tax on remuneration attributable to business travel by qualified non-resident employees in Canada.  In addition, employers who are partnerships can also apply for certification where the beneficial interest in the partnership’s earnings is at least 90% attributable to partners who are residents of treaty countries.

A qualified non-resident employee is one who:

  • is resident in a country with which Canada has a tax treaty at the time of payment;
  • is not liable to Canadian income tax on the payment because of the tax treaty; and
  • has less than 45 work days in Canada in a calendar year or is present in Canada for any purpose for less than 90 days in any 12-month period

The ‘days’ test is a physical presence test and includes days during which the employees may not be working or worked for a different employer. To ensure their employees continue to meet this criterion, the employers need to track, monitor and record on real time basis, employee activity in Canada.

Application process

Certification can be applied for by filing Form RC473, Application for Non-Resident Employer Certification with CRA. The application should be accompanied with Form RC1, Request for a Business Number. The CRA recommends filing the application at least 30 days in advance of when the employer wishes the certification to be effective.

Once the certification application is processed, the CRA informs the employer in writing of the approval and the effective date of the certification. Until such approval is received, the employer is required to withhold Canadian tax at source or ensure that an appropriate waiver has already been received by the employee. A confirmed employer certification is valid for a period of up to 2 years.

Responsibilities post receiving certification

Non-resident employer certification removes the requirement for non-resident employers to withhold and remit tax when they pay Canadian sourced employment income to qualifying non-resident employees. However, to maintain this status, the employer is required to:

Ensure employee maintains treaty exempt status – For this purpose the employer must evaluate and document how the employee meets the conditions of qualified non-resident employee. Employer is also required to have documents in support of the employee’s country of residence and tax treaty exemption. Further, the qualified employer should track and document on an ongoing basis, the employee’s physical presence in Canada and employment income attributable to such presence.

Continued tax compliance – The employer is required to comply with all corporate tax and payroll reporting requirements applicable to him/her under the Canadian tax laws. This could include filing a corporate income tax return if carrying on business in Canada, or payroll reporting requirements where the remuneration attributable to business travel in Canada exceeds $10,000.

Make books and records available – Upon CRA’s request, the employer is required to make its books and records available in Canada for inspection by the CRA for purposes of administering the employer certification agreement and withholding requirements under Canadian tax laws.

Failure to meet any of the conditions

It is to be noted that CRA can deny or revoke certification if the employer fails to meet the specified conditions, or fails to comply with its Canadian tax obligations. Prior compliance with withholding, remitting, and reporting obligations will not affect the employer’s ability to become certified, except where the non-compliance occurred during a period for which the non-resident employer was a certified non-resident employer. However, becoming certified does not remove the liability of the employer related to any prior withholding obligations.

Employers will continue to be liable for any withholding in respect of non-resident employees found not to have met the conditions outlined above. If, after reasonable enquiry, an employer finds that its employee no longer meets the definition of a qualifying non-resident employee, the employer should immediately write to the CRA and disclose in detail the employee's circumstances explaining why the employee no longer qualifies. However, if the employee is not found to be treaty-exempt, the employer is expected to start withholding immediately on any payments of employment income and to make arrangements to provide tax withholdings on any employment income already paid to him or her.

In addition, as long as the CRA is satisfied that the employer took prudent measures to proactively monitor and confirm the employee's ongoing status, it may waive any required tax withholdings retroactively for that employee. If the employer does not notify the CRA when the employee no longer meets the definition of a qualifying non-resident employee, the CRA may assesse tax, interest, and penalty on all payments of employment income made to that employee. The CRA could also revoke the employer’s certification.

Moving ahead

The new measures are a welcome development, as it provides relief to non-resident employers who send short-term business travelers to Canada. The employer certification program allows employers to effectively and efficiently manage their obligations, while at the same time protects the CRA’s enforcement abilities to ensure that the proper amount of Canadian tax is assessed and collected. The certified employer has to undertake prudent measures to ensure that its employees meet the conditions and fulfill the obligations. If the certified employer has taken reasonable steps, then the CRA’s position is to accommodate the employer – a welcome step for business travelers to Canada.

Key contacts

Sam Persaud
Partner, Public Sector
416-601-6247
Doreen Hume
Partner, Audit
613-751-5401
Dennis Alexander
Partner, Tax
416-601-5943
Editors
Trisha Patel
Senior Manager, Public Sector
416-775-7104
Lilian Cheung
Senior Manager, Public Sector
416-775-7356
Collaborators
Shivani Joshi
Manager, Tax
416-202-2499

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