Posted on - Dec 11, 2012

By: Paul Brace & Tarsem Basraon

Temporary foreign workers are often unaware of the potential tax consequences of working in Canada. Many workers commute back and forth from their home country without becoming Canadian residents. There are several issues to be aware of for people working temporarily in Canada.

Canadian Income Tax

An employee who is working in Canada but does not become a Canadian resident will generally be subject to Canadian federal income tax on Canadian source income only, including income from employment performed in Canada. If the employee is a resident in a country which has entered into a tax treaty with Canada, the treaty may provide for an exemption from Canadian tax on the non-resident employee’s Canadian employment income, in limited circumstances. For example, under the Canada-U.S. Income Tax Convention, an individual who is a U.S. resident will not be taxed in Canada on the income from employment performed in Canada in a year if: (i) the remuneration does not exceed $10,000 (Canadian); or (ii) the non-resident is in Canada for 183 days or less in the year and the remuneration is not “borne by” a Canadian employer. If an individual exercises his duties in Canada for a Canadian company that reimburses a U.S. entity for the employment costs, the Canada Revenue Agency considers the remuneration paid by the U.S. entity to be “borne by” the Canadian employer and, therefore, the exemption does not apply.

Canada Pension Plan Contributions

In general, residency is not a requirement for coverage under the Canada Pension Plan (“CPP”). An employee transferred into Canada who reports to work or receives payment from an establishment of the employer in Canada is covered by CPP. However, the employee may also be covered under the social security system in his or her country of residence. Such dual coverage is generally dealt with in a reciprocal social security agreement between Canada and the employee’s country of residence.
Payroll Deductions

Where a non-resident exercises employment in Canada, his employer (whether Canadian or non-resident) is required to withhold income tax in respect of the employment, even if the remuneration received by the employee is exempt from Canadian taxation under a tax treaty. However, where a treaty exemption applies, the non-resident individual may apply to CRA for a waiver from or a reduction of the withholding tax otherwise exigible.

An application for a waiver from withholding tax will not relieve an employer from the obligation to withhold and remit CPP contributions and premiums under the Employment Insurance Act. However, CPP contributions will generally not be required, if the employer is not a resident of Canada and does not have an establishment in Canada. For a Canadian resident employer, CPP contributions are not required, if a certificate certifying that there is social security coverage of the employee in another country is provided to CRA under the relevant social security agreement between Canada and that other country. In addition, employment insurance (EI) premiums are not payable where the individual is already subject to similar premium requirements in their home country.

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