hot tax issues and challenges – mobility to and from canada bill fridfinnson february 21, 2013

Hot Tax Issues and Challenges – Mobility to and from Canada

Bill Fridfinnson

February 21, 2013

© Deloitte LLP and affiliated entities.

Hot Tax Issues and Challenges

Agenda

1. Non-resident Travelers to Canada

2. Overseas Employment Tax Credit – Impact of Phase-out

3. Tax Considerations of Temporary Living Costs

4. Stock Option Plans - Issues and Challenges

2 Hot Tax issues and Challenges – Mobility to and from Canada

Non-resident Travelers to Canada

3


Non-resident Travelers to Canada


Reg. 105/Transfer Pricing

(Corporate)

PE/Services PE(Corporate)

Reg 102/ Waivers(HR-Payroll)


Current State – Regulation 102 Rules

Under Regulation 102 of the ITA, every person (corporation, partnership, other legal entity) paying remuneration to non-resident employees working in Canada must withhold Canadian income tax at source on the Canadian source earnings.

• Withholding obligation applies to non-resident employers.

• Any amount of Canadian source income is subject to the rules….there is no deminimus amount.

• Withholding obligation applies even if the employee is ultimately exempt from Canadian tax under a Tax Treaty.

• Only exception is where a waiver is obtained authorizing no withholding.



Current State – Regulation 102 RULES

The current waiver process is done on an employee-by-employee basis:

• The R102 - J waiver is a joint employee/employer application used when the employee’s total Canadian remuneration is less than $10,000 for the US residents or $5,000 for residents of other treaty countries.

• The R102 - R waiver is an employee only application used when the employee is expected to earn more than $10,000 when a US resident (or $5,000 when a resident of another treaty country), but the income is exempt under other treaty conditions (i.e. remuneration not borne by a PE the NR employer has in Canada).



Current State – Enforcement of RulesEmployer Considerations:

• CRA is currently assessing Reg. 102 tax withholdings in all situations were a waiver has not be obtained.

• The employer must prepare a T4 slip and T4 Summary to report the Canadian source compensation and tax withheld at source.

• CRA requires the non-resident employer to register and open payroll accounts.

• The employer is liable to pay the taxes that should have been withheld from the NR employees, but wasn’t.

• Penalties of 10% (or 20% for certain situations) are being imposed on tax amounts which the employer was required to withhold, plus interest.

The negotiated deals or concessions with CRA that may have been allowed in the past by different district offices, are no longer happening. The same enforcement of the rules is now being applied consistently all across the country.



Current State – Enforcement of Rules

Employee Considerations:

• The NR employee is required to obtain either a Canadian SIN or ITN (Individual Tax Number) for reporting purposes (e.g. T4 slip).

• If the employee is treaty exempt but no waiver was filed, they must file a NIL personal tax return to be refunded the Reg. 102 taxes paid.

• CRA is not allowing any withholding taxes be refunded back to the Company directly. All refunds must be made in the name of the employee. This can be a problem if the tax was originally funded by the employer.

• The R102-R waiver can’t be filed retroactively. It must be submitted at least 30 days prior to the employee beginning work in Canada. The R102-J waiver can however be approved retroactively up to 60 days prior to the date a complete waiver application is received.



Future State – What Should NR Companies be doing?CRA is continuing its active audit activity on cross border services so Companies should not ignore the Reg. 102 issue. Instead they should:• Put policies and processes in place to track employees in Canada and

determine the Canadian source remuneration.

• Consider use of the voluntary disclosure program to get prior years into compliance, before the problem is identified on audit.

− With a voluntary disclosure the penalties are generally waived

• Use the waiver process, but note that waivers for employees who were non-compliant in prior years, won’t be approved.

• Realize that to qualify for the proposed “employer certification” program, the employer will need to be compliant in the current year and possibly prior years.



Future State – What is CRA doing?

• The CRA recognizes the administrative burden faced by NR employers and treaty exempt NR employees with the reporting and withholding obligations.

• CRA is working on a more comprehensive policy to make it easier for employers to comply, including:

– New Dec. 2012 administrative relief for NR employees in Canada on conferences.

– Possible “employer certification” program which will permit NR companies to become “certified” and therefore allow all NR employees meeting certain conditions (e.g. days threshold - under 60 days) to be exempted from the Reg. 102 rules.



Administrative Relief - Conferences

• Dec. 21, 2012 CRA issued administrative relief from Reg.102 W/H taxes and reporting (e.g. T4s) for certain people attending conferences in Canada.

• Relief applies only if there is an income tax treaty between Canada and the employee’s country of residence.

• Conditions required:

i. The NR employee must be present in Canada for 10 days or less (including travel time) to attend the conference.

ii. If the employee is a resident of the US, the employee must earn less than $10,000 in the year from employment (including the amount earned during the conference period), or $5,000 if the employee is resident in another treaty country.




• If an employee is working in Canada immediately before or after the conference, only the days (maximum of 10) spent at the conference will be exempted.

• Employee still required to obtain a waiver of the W/H tax for the work days spent before or after.

• The relief will not be allowed in circumstances the CRA considers to be abusive. For example the relief will not apply where an employee participates in numerous conferences in a year.




What is a “ Conference”?

CRA has defined a conference to be a formal meeting attended by a minimum of 30 participants for professional purposes. The participants may work for the same employer or different employers. The participants are not providing services for which their employer is receiving a fee from another person. In addition, the participants are not soliciting business on behalf of their employer; providing services to a parent, subsidiary, or partnership related to their employer; marketing their employer’s services or products, or meeting with clients regarding their employer’s business.


Overseas Employment Tax Credit Impact of Phase-out

14


OETC Phase-Out – What is it?

• The March 29, 2012 Federal Budget included an unwelcome surprise of the phase-out and ultimate elimination of the OETC.

• OETC = an individual’s tax payable on 80% of his/her qualifying foreign income up to a maximum of $100,000

• In Alberta the maximum benefit of the OETC is $80,000 x 39% tax rate = $31,200

• The OETC is being phased-out through a reduction in the percentage of qualifying income, eligible for the credit.



OETC Phase-Out

• The Phase-out between 2012 – 2016 is as follows:

• 2012 - 80% of qualifying income up to $100,000• 2013 - 60% of qualifying income up to $100,000• 2014 - 40% of qualifying income up to $100,000• 2015 - 20% of qualifying income up to $100,000• 2016 – 0% of qualifying income up to $100,000

• Relief from the “Phase-out” is available where the employer is committed to a particular project in writing before March 29, 2012.



OETC Phase-Out – relief provisions

• Relief from the phase-out will be extended to situations where an employer has submitted a written irrevocable tender before the budget date, but the tender was only accepted at a later date.

• If relief available, no phase-out in 2013-2015 (e.g. OETC still based on 80% of $100,000 of qualifying income).

• OETC is still eliminated entirely in 2016.



OETC Phase-Out – What to do now?

• Quantify the exposure as a result of the loss of the OETC by:

– Identifying which contracts/projects your employees are working on that will be grandfathered until 2015.

– How does the Company tax policy address the OETC benefit….employee benefit, employer benefit or joint?

– Determine the extent to which the tax savings realized by the employee from the OETC can be replaced by claiming FTCs.

– Determine which employees have been guaranteed a net pay or the full benefit of the OETC in their contracts, throughout the phase-out period and beyond.


Tax Considerations of Temporary Living Costs

19


Temporary Living Costs - Canada

Normally employer paid housing, travel and meals costs are taxable benefits to the employee for Canadian tax purposes.

• An exemption from the taxable benefit rules, under Section 6(6) of the Income Tax Act applies for an employee where:– Amounts paid or allowances received must be reasonable

– Employee must be working at a “special worksite” and performing duties that are “temporary” in nature

– Employee maintains a self-contained domestic establishment as a principal place of residence, at their main place of employment, that:

• is available for use by employee and not rented out; and

• by virtue of distance from site, employee could not be expected to commute daily

• Employer should get TD4 form from employee.20 Hot Tax issues and Challenges – Mobility to and from Canada


Temporary Living Costs - Canada

Common Issues Identified

• Assignment/duties not of a temporary nature (i.e. CRA considers temporary not to exceed 2 years…but what happens if it does?)

• Definition of a self contained domestic establishment should include a residence where the employee either has title to the property or has a formal legal lease agreement in their name (living in a parents home does not meet the test)



Temporary Living Costs - US

• Employer paid housing, travel and meals/allowances are taxable benefits to the employee for US tax purposes.

• Where employee is “temporarily” away from home, such employer – paid expenses where the are part of an “accountable plan” are not taxable.

– “Temporary” defined to mean a work period expected to be less than 12 months at the start of the assignment

– If the 12 months is exceeded than only those costs in month 13 become taxable

– Where an employee makes frequent short trips to another location over a period of a couple of years, issue arises as to whether it should be considered one continuous period



Temporary Living Costs – Challenges

• Different tax treatment in different countries can result in different payroll reporting and withholdings (e.g. Mexico doesn’t have any exemptions at all so all housing costs for example would be fully taxable from day 1).

• Tax protection or tax gross-ups may be necessary to keep the employee whole.

• Some countries like the US post what the prescribed per diems for food and lodging will be for most locations in the US and some foreign countries. Exceeding these amounts will result in taxable benefits arising.


Stock Option Plans - Issues and Challenges

24


Stock Option Plans- Current Rules

• Pursuant to Section 7 of the Canadian Income Tax Act:

– The difference between the exercise price of the option and the FMV of the share at date of exercise is treated as employment income for T4 purposes (i.e. (“stock option benefit”).

– The stock option benefit is generally subject to a 50% personal tax deduction in Canada, so effectively only 50% of the gross benefit is subject to tax. It is therefore taxed at a similar rate to a capital gain.



Stock Option Plans- Current Rules

Pursuant to Section 7 of the Canadian Income Tax Act

– To qualify for this 50% benefit, certain conditions must be met:

i. There must be an agreement to issue shares/securities

ii. Exercise price > FMV of shares at grant

iii. Shares issued must be “prescribed shares”…a defined term!

iv. The employee must be at arms length



Stock Option Plans- Common Issues

• Foreign based plans (particularly UK & US drafted plans) often do not qualify for the 50% stock option deduction because:– No agreement to issue shares/securities actually exists.

Basically there is only an agreement if the employee can force the Company to settle in newly issued or treasury shares.• If the compensation committee (e.g. Employer) reserves the right to

settle awards in shares or an equivalent amount in cash, or;• The company can reduce the number of shares issuable to account

for the applicable withholding taxes (e.g. net settlement), then

The stock option plan is offside Section 7 of the ITA and the Plan will not qualify for the stock option deduction. This means the employee is taxable on 100% of the option benefit rather than just 50%.



Stock Option Plan- Common Issues

Foreign and Canadian based plans often do not qualify for the 50% stock option deduction because of the following common provision:

• The Employer (Compensation committee) authorizes the employee to satisfy the exercise of the exercise price of an option through one of the following methods: (1) Cash; (2) Broker assisted sale of shares; or (3) tender of previously acquired shares to the company.– In this scenario, the employee’s right to unilaterally tender

shares violates on of the “prescribed share conditions” required to get the 50% deduction.



Stock Option Plans- Common Fixes

To ensure the 50% deduction is available to your company’s employees, the Company should:

i. Have the wording for all Plan Agreements and Award Agreement reviewed to determine if the plan is offside the Canadian rules……particularly stock option plans of foreign based parent companies.

ii. Modify the agreements to put Plans back onside, or add a Canadian addenda to the Plan

iii. Plan documents should apply to all employees taxable in Canada on their employment income. (e.g. domestic employees, expatriate employees, short term business travelers to Canada, etc.)


Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte operates in Quebec as Deloitte s.e.n.c.r.l., a Quebec limited liability partnership. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. © Deloitte LLP and affiliated entities.

hot tax issues and challenges – mobility to and from canada bill fridfinnson february 21, 2013

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