Relief from Regulation 102 Withholdings
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(June 1, 2015) Canada’s Budget 2015 proposes new exceptions to Regulation 102 which would take effect as of January 1, 2016. The changes are designed to provide relief for some non-residents that engage in cross-border trade and business when dealing with Regulation 102 withholding requirements and waiver applications.
Regulation 102 of the Income Tax Act requires employers (whether or not they are Canadian residents) to register their employees in Canada on a Canadian payroll, withhold part of the employee salaries, and remit these withholdings on a periodic basis. Even if the employee is exempt from Canadian tax because of a tax treaty, Regulation 102 still requires non-resident employers to withhold part of a non-resident employee’s salary.
However, non-resident employers can file a request to be exempted from their Regulation 102 obligation to withhold taxes if:
- The remuneration is not paid directly or indirectly by an employer who is resident in Canada, and
- It is not borne by a Permanent Establishment in Canada of the employer.
Non-resident employees appearing for work in Canada qualify to request the withholding exemption if:
- Their expected annual income in Canada is less than $10,000 (for US citizens) or less than $5,000 (from other countries that have tax treaties with Canada), or
- The employee is present in Canada for less than 183 days in a 12 month period.
However, this exemption is not automatic, and a Regulation 102 waiver must be applied for on a timely basis each time the exemption is being claimed.
2015 Budget Proposed Changes (Regulation 102):
The Budget 2015 proposal regarding Reguation 102 would exempt qualifying non-resident employers from withholding payments to qualifying non-resident employees who appear for work in Canada. According to the CRA, employees will qualify as non-resident employees if:
- They are exempt from Canadian income tax because of a tax treaty; and
- They are not in Canada for 90 or more days in any 12-month period that includes the time of the payment.
In order to qualify as a non-resident employer, the employer must:
- Be resident in a country with which Canada has a tax treaty;
- If the employer is a partnership, at least 90% of the partnership’s income during the time of the payment must be allocated to persons that are resident in a treaty company;
- The employer must not carry on business through a Canadian permanent establishment in the fiscal period including the time of payment;
- The employer must be certified by the Minister of National Revenue. (Certification may be denied or revoked if the employer does not meet the conditions described above or fails to comply with its Canadian tax obligations.)
Although employers meeting the non-resident qualifications will not have to withhold payments to non-resident employees, they will still be responsible for their reporting requirements with respect to amounts paid to their employees.
This change in the 2015 budget to Regulation 102 will provide relief to companies that send employees into Canada for short periods, since they will not need to apply for a Regulation 102 exemption for each employee when they enter Canada. However, non-resident employers may have to modify their payroll system to keep track of how many days their employees are in Canada.
UHY Victor has expertise in assisting non-resident businesses expand into Canada and with Regulation 102 payroll issues. Please contact Jon Levy at jlevy@uhyvictor.com if you have any specific questions regarding Regulation 102.
