Expert: Shirley McAllister, CPP, PHR - 6/30/2011

Question
We currently have U.S employees working in Canada.  We have offices in both the U.S and Canada.  Last year these employees were paid out of our U.S companies payroll even though they were reporting to the Canadian office for work.  I am pretty sure no Canadian taxes were deducted for these employees at that time, and no T4's were issued.  We are now paying them out of our Canadian office, and taxes are being remitted.  My question is this..when does a U.S employee become taxable in Canada?  My answer to our HR department was from day 1 of work, their response was after 183 days of employment they are taxable.  Can you clarify which is correct?

Thank you.

Answer
If the company has a permanent office in Canada the employee will have to file a Canadian tax return and pay Canadian taxes on income earned in Canada even though they are not there 183 days.See below for more explanation.

I would agree with you that since you have an office in Canada taxes are from day 1.

If the US company has a “Permanent Establishment” in Canada, it has to file a Canadian tax return and pay Canadian taxes on income earned in Canada. A permanent establishment is very broadly defined in the Income Tax Act. The definition for individuals and corporations is very similar.
A fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and where the corporation does not have any fixed place of business it means the principal place in which the corporation’s business is conducted.

If an employee is a resident of Canada, either because they live in Canada or because they are deemed to be a Canadian resident because they stay in Canada for 183 days or more in a year, they must file a Canadian tax return and pay tax on their worldwide income.

However, if the employee is a US resident, and was only in Canada for a short time in the year, they may still have to pay Canadian taxes and file a Canadian tax return if they earned Canadian employment income. If the employer had a permanent establishment in Canada, the employee will be required to pay taxes on the employment income earned in Canada even though they are a non-resident.

The rules are different if there is a office in Canada.

The kicker is the employee is still liable for U.S. Taxes on his worldwide income. He can get a foreign exclusion on his U.S. income which will exclude part of the income.

Due to the totalization agreement Social Security taxes and Medicare taxes are still paid to the U.S. if the employee is in Canada less than 5 years.

I suggest that your Company consult council or at the very least call Employment Standards in Canada and find out the correct way to tax these employee. If they are waiting 183 days it is not being done correctly.

The IRS site has the Canadian tax treaty but it also state it does not have the rules of the Canadian government contained within the publication.
http://www.irs.gov/publications/p597/ar01.html

From the Canadian Dept of Justice Labour Code it says that they are not taxed if they are in the country for less than 183 days providing they are not paid by a company with a permanent residence in Canada and your company has a permanent residence in Canada.

http://laws-lois.justice.gc.ca/Search/Search.aspx?&h1dd3n1d=E1%3aPN586IJMDSM4-31...

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in a calendar year in the other Contracting State shall be taxable only in the first-mentioned State if:

[...]

(b) The recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by an employer who is a resident of that other State or by a permanent establishment or a fixed base which the employer has in that other State



Shirley