COVID-19 has resulted in Canada and other governments around the world imposing restrictions on international travel (“Travel Restrictions”). The Canada Revenue Agency (the “CRA”) recently released guidelines outlining its approach to addressing some of the prevalent international income tax issues which may result from Travel Restrictions (the “Guidelines”). Two key takeaways from reviewing the Guidelines are: (1) the CRA states that the Guidelines are intended to assist taxpayers – they do not constitute a reinterpretation or broadening of CRA administrative policy; and (2) generally speaking, the CRA is prepared to offer relief in certain circumstances where technical non-compliance results solely from the imposition of Travel Restrictions. However, relief is not currently being extended in all situations where adverse Canadian tax consequences result from the application of Travel Restrictions. Taxpayers should carefully review the Guidelines to determine how they are affected having regard to their own particular circumstances.
The Guidelines are in effect from March 16, 2020 to June 29, 2020, subject to any extension.
Below is a summary of the CRA’s view on the international income tax issues set out in the Guidelines.
Income Tax Residency for Corporations. Subject to the application of a tax treaty, a corporation formed outside Canada may be considered to be resident in Canada for income tax purposes if its central management and control are located in Canada. The place of directors’ meetings is one factor, but not necessarily determinative, in locating central management and control. The Guidelines state that the CRA will not consider a corporation to be resident in Canada solely because a director participates in a directors’ meeting from Canada due to Travel Restrictions. However, the Guidelines do not expressly provide similar relief where an individual prevented from leaving Canada exercises central management and control of a corporation outside of directors’ meetings. It is hoped that the CRA’s position will be expanded so that a corporation does not inadvertently become resident in Canada solely because Travel Restrictions force a corporation’s controlling mind to physically remain in Canada.
Carrying on Business in Canada/Permanent Establishment. Generally, a non-resident corporation that carries on business in Canada is required to file a Canadian income tax return, and is liable for Canadian income tax on the business income that it earns in Canada. However, a corporation that is eligible for benefits under an applicable income tax treaty is generally exempt from Canadian income tax on its business profits, except to the extent that those profits are attributable to a “permanent establishment” situated in Canada.
The Guidelines state that if a non-resident corporation is considered to carry on business in Canada solely because its employees are prevented by Travel Restrictions from leaving Canada:
- no relief is provided from the obligation to file a Canadian income tax return for the relevant period;
- a corporation that qualifies for benefits under a tax treaty will not be considered to have a permanent establishment in Canada, or a deemed permanent establishment under the “agency permanent establishment” rule, provided in the latter case that contracts would not have been concluded in Canada but for Travel Restrictions; and
- if the corporation does not qualify for treaty benefits, the CRA will consider whether to apply administrative relief from the corporation’s Canadian tax payment obligation on a case-by-case basis.
Income Tax Residency for Individuals. Subject to the application of a tax treaty, an individual may be considered to be resident in Canada for income tax purposes either: (a) based on their residential ties to Canada under the common law; or (b) by being physically present in Canada for 183 days in a calendar year. Under the Guidelines, the period of time during which an individual is unable to return to their home country solely due to Travel Restrictions is not considered for the purpose of the common law residency test, and as an administrative concession the CRA will not count this time in determining whether the 183-day threshold is met for deemed residency, provided that the individual returns to their country of residence once permitted to do so.
Cross-border employment income for Non-Resident Employees. A number of Canada’s bilateral tax treaties provide relief from Canadian income tax on employment income earned in Canada to a qualifying non-resident of Canada whose physical presence in Canada does not exceed a specified number of days within a given period of time. The Guidelines state that time spent in Canada due solely to Travel Restrictions will not count in determining whether the applicable threshold is met.
Cross-border employment income for Canadian Resident Employees. Letters of authority issued by the CRA to non-resident employers in respect of source deductions for Canadian residents performing their employment duties outside of Canada will continue to apply, provided that there are no other changes to the withholding obligations of the non-resident entity in its jurisdiction.
Waiver Requests – Payments to Non-residents for Services Provided in Canada. COVID-19 has resulted in longer processing times by the CRA in respect of requests to waive the withholding requirements set out in Regulations 102 and 105 of the federal Income Tax Regulations. Such regulations govern the tax withholdings and deductions relating to remuneration paid to or certain services performed by non-residents in Canada. If a waiver request is not processed within 30 days, the CRA will not assess a person who fails to deduct, withhold or remit any amount as required by Regulations 102 and 105, provided that: (1) the only reason a non-resident person could not obtain a waiver from the CRA was due to the interruption in processing waiver requests; and (2) the payor can show that it has taken reasonable steps to verify that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax due to an income tax treaty with Canada.
Disposition of Taxable Canadian Property by Non-residents of Canada. The CRA has also encountered longer processing times of certificates of compliance (under Section 116 of the federal Income Tax Act) to non-resident vendors who dispose of certain taxable Canadian property. Due to the delays, a purchaser or vendor may request a comfort letter from the CRA. The CRA has indicated that “urgent requests for comfort letters may be submitted on a temporary basis”.
Please do not hesitate to contact a member of our team with your questions about the impact of COVID-19 on your tax compliance obligations. For more information about dealing with COVID-19, please visit our COVID-19 Resource Center.
We wish all our clients, friends and colleagues good health during these exceptional circumstances.