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What is Regulation 102?
Regulation 102 is a Canadian tax regulation that applies when non-resident employees are paid to perform services in Canada.
Regulation 102 states that when a non-resident employee is paid for rendering services in Canada, their employer is subject to the same withholding, remitting, and reporting obligations as those for Canadian resident employees. Regulation 102 withholdings are not necessarily the final amount of Canadian taxes that the employees owe; rather it is an instalment against the taxes that they might ultimately need to pay. What are my obligations as an Employer?
Withhold and Remit Taxes
As an employer paying an employee providing services in Canada, you need to withhold and remit withholding tax and potentially other source deductions (e.g. Canada Pension Plan contributions, Employment Insurance Premiums) unless a waiver of withholding tax has been issued by the Canada Revenue Agency (CRA).
Note that these obligations extend to non-residents of Canada employing either resident or nonresident employees for services performed in Canada.
These deductions on behalf of the non-resident employee must be remitted, together with the applicable employer’s portion, to the employer’s CRA business number account. Warning: If an employer does not deduct and remit an amount as required by Regulation 102, they will be held liable for the whole amount (both employer and employee portions) together with any interest and penalties.
File a T4 Information Return
Employers are required to prepare and file a T4 Information Return (T4 Slips and Summary Form) with the CRA, reporting all amounts paid to their employees whether or not a waiver of withholding was received from the CRA. The filing deadline is the last day of February in the year following the year in which the payments were made. They must also send each an employee a copy of their T4 information slip by the last day of February.
How do employees Recover Amounts withheld under Regulation 102?
Regulation 102 withholding does not represent a final tax of the non-resident employee; rather, its an instalment against the taxes that they might ultimately need to pay.
Non-resident employees are normally required to file a Canadian income tax return to calculate their tax liability or to obtain a refund. The ultimate tax liability will be determined after the assessment of the non-resident’s Canadian income tax return.
Non-resident income tax returns should be sent to:
International Tax Services Office
2204 Walkley Road
Ottawa ON K1A 1A8
How can an American employer avoid Regulation 102 withholdings?
If there is ultimately no tax payable expected as a result of the non-resident’s employees earnings being exempt from Canadian tax under a tax treaty, a waiver can be obtained to eliminate the withholdings.
There are two ways in which an employer may be relieved of their obligation to withhold taxes under Regulation 102:
A non-resident employer can file an Application for Non-Resident Employer Certification. If approved, the employer certification allows for a blanket waiver to cover all eligible employees who are exempt from paying income tax in Canada under a tax treaty without withholding and remitting tax, eliminating the need for non-resident employees to request waivers of withholding. Non-resident employer certification will be valid for up to two calendar years.
Employees resident in countries having a tax treaty with Canada that will exempt an employee’s income from tax in Canada can apply for a waiver of withholding tax by completing and filing Form R102-R, Regulation 102 Waiver Application, with the Canada Revenue Agency (CRA).
A completed and signed R102-R must be submitted 30 days before either the start of the employment services in Canada or the initial payment for the employment services.
We have expertise in assessing filing requirements, applying for waivers and filing personal income tax returns to recover Regulation 102 withholdings.
Contact us for a free consultation regarding your Regulation 102 issues:
UHY Victor LLP Canada U.S. Tax Team