November 23, 2012
Cross-Border Consequences of Secondment
This posting was authored by Cheryl Teron and Stephen Rukavina
Miller Thomson LLP.
This posting was authored by Cheryl Teron and Stephen Rukavina
Miller Thomson LLP.
Secondment often involves one company (the
“Lending Employer”) lending its employees to another related company in another
country (the “Receiving Employer”) for the benefit of the Receiving Employer. For example, a United States (“US”) parent
corporation could lend one or more of its employees to its Canadian subsidiary.
“Lending Employer”) lending its employees to another related company in another
country (the “Receiving Employer”) for the benefit of the Receiving Employer. For example, a United States (“US”) parent
corporation could lend one or more of its employees to its Canadian subsidiary.
In such a secondment arrangement, supervision
of the seconded employees is the responsibility of the Receiving Employer. However, the employees usually remain on the
Lending Employer’s payroll, with the Lending Employer paying the employees
their wages net of any home and host country taxes and other amounts required
to be withheld and remitted (“payroll taxes”).
The Receiving Employer reimburses the Lending Employer its payroll costs
net of any payroll taxes the Receiving Employer is required to withhold and remit
under the laws of the host country.
of the seconded employees is the responsibility of the Receiving Employer. However, the employees usually remain on the
Lending Employer’s payroll, with the Lending Employer paying the employees
their wages net of any home and host country taxes and other amounts required
to be withheld and remitted (“payroll taxes”).
The Receiving Employer reimburses the Lending Employer its payroll costs
net of any payroll taxes the Receiving Employer is required to withhold and remit
under the laws of the host country.
Typically, the Receiving Employer remits payroll
taxes required to be withheld and remitted by the host country. The Lending Employer remits payroll taxes
required to be withheld and remitted by the employees’ home country.
taxes required to be withheld and remitted by the host country. The Lending Employer remits payroll taxes
required to be withheld and remitted by the employees’ home country.
Why Use Secondment?
The main tax benefit of secondment is that,
when structured properly, it enables a non-resident Lending Employer to avoid
Canada’s jurisdiction to tax, while still enabling the Lending Employer to lend
employees to a Canadian Receiving Employer.
when structured properly, it enables a non-resident Lending Employer to avoid
Canada’s jurisdiction to tax, while still enabling the Lending Employer to lend
employees to a Canadian Receiving Employer.
Under the Income Tax Act, Canada has the jurisdiction to tax the profits
earned by a non-resident from carrying on a business in Canada. Tax treaties restrict this jurisdiction to
tax to profits attributed to a “permanent establishment” in Canada. For this restriction to apply, the
non-resident must be a resident of a country that has entered into a tax treaty
with Canada and must be qualified for benefits under that treaty. For example, under the Canada-US Tax Convention, a US resident carrying on a business in
Canada will not be taxable in Canada on its Canadian-source business profits unless
the US resident has a permanent establishment in Canada (assuming limitation on
benefits rules do not deny the treaty benefit).
earned by a non-resident from carrying on a business in Canada. Tax treaties restrict this jurisdiction to
tax to profits attributed to a “permanent establishment” in Canada. For this restriction to apply, the
non-resident must be a resident of a country that has entered into a tax treaty
with Canada and must be qualified for benefits under that treaty. For example, under the Canada-US Tax Convention, a US resident carrying on a business in
Canada will not be taxable in Canada on its Canadian-source business profits unless
the US resident has a permanent establishment in Canada (assuming limitation on
benefits rules do not deny the treaty benefit).
Secondment is used to prevent a
non-resident Lending Employer from being found to carry on a business in Canada
or have a permanent establishment in Canada.
Since the Receiving Employer is considered to be the employer under a properly
structured secondment arrangement, the seconded employees cannot be used to
show the Lending Employer is carrying on a business in Canada or has a
permanent establishment in Canada. Note,
the seconded employees must actually be doing the Receiving Employer’s work as
an employee and should not be performing work on behalf of the Lending Employer
while on secondment.
non-resident Lending Employer from being found to carry on a business in Canada
or have a permanent establishment in Canada.
Since the Receiving Employer is considered to be the employer under a properly
structured secondment arrangement, the seconded employees cannot be used to
show the Lending Employer is carrying on a business in Canada or has a
permanent establishment in Canada. Note,
the seconded employees must actually be doing the Receiving Employer’s work as
an employee and should not be performing work on behalf of the Lending Employer
while on secondment.
Another tax benefit of secondment is that,
when structured properly, it prevents certain withholding and goods and
services (“GST”) and harmonized sales tax (“HST”) requirements from applying to
the reimbursements of payroll taxes paid by the Receiving Employer. These topics are discussed below
when structured properly, it prevents certain withholding and goods and
services (“GST”) and harmonized sales tax (“HST”) requirements from applying to
the reimbursements of payroll taxes paid by the Receiving Employer. These topics are discussed below
What
Type of Withholding Obligations Does Secondment Raise?
Type of Withholding Obligations Does Secondment Raise?
Section 105
Section 105 of the Income Tax Regulations requires every person paying to a
non-resident an amount in respect of services rendered in Canada to withhold
15% of such payment. The reimbursement
paid to the Lending Employer by the Receiving Employer could trigger the 15%
withholding tax, and the Receiving Employer would have to withhold and remit
15% of the reimbursement.
non-resident an amount in respect of services rendered in Canada to withhold
15% of such payment. The reimbursement
paid to the Lending Employer by the Receiving Employer could trigger the 15%
withholding tax, and the Receiving Employer would have to withhold and remit
15% of the reimbursement.
However, the Canada Revenue Agency’s
administrative position is that section 105 will not apply to a secondment
provided the following conditions are met.
First, the arrangement must be a valid secondment. The Canada Revenue Agency has stated
requirements to which a secondment must conform in order to be considered valid. Second, the Lending Employer must generally lend
the employees at cost.
administrative position is that section 105 will not apply to a secondment
provided the following conditions are met.
First, the arrangement must be a valid secondment. The Canada Revenue Agency has stated
requirements to which a secondment must conform in order to be considered valid. Second, the Lending Employer must generally lend
the employees at cost.
Section
102
102
Section 102 of the Income Tax Regulations requires both resident and non-resident
employers to withhold and remit Canadian payroll taxes from amounts paid to
non-resident employees for work done in Canada.
In the context of secondment, the Lending Employer, Receiving Employer,
or both may be required to make the section 102 withholding and remittance. Penalties and interest will be assessed on a
failure to comply. Normally, it is the
Receiving Employer who makes the remittance to the Canada Revenue Agency.
employers to withhold and remit Canadian payroll taxes from amounts paid to
non-resident employees for work done in Canada.
In the context of secondment, the Lending Employer, Receiving Employer,
or both may be required to make the section 102 withholding and remittance. Penalties and interest will be assessed on a
failure to comply. Normally, it is the
Receiving Employer who makes the remittance to the Canada Revenue Agency.
Section 102 will only apply if payroll taxes
are required to be withheld from the non-resident employees’ earnings. The relevant payroll taxes are Canadian
income tax, Canada Pension Plan (“CPP”) contributions, and Employment Insurance
(“EI”) premiums. In the context of
secondment, there are various exemptions that may exempt the non-resident
employees’ income from payroll taxes.
are required to be withheld from the non-resident employees’ earnings. The relevant payroll taxes are Canadian
income tax, Canada Pension Plan (“CPP”) contributions, and Employment Insurance
(“EI”) premiums. In the context of
secondment, there are various exemptions that may exempt the non-resident
employees’ income from payroll taxes.
Canadian Income Tax
The Income
Tax Act imposes tax on the taxable income of a non-resident person who was
employed in Canada at any time in the year or a previous year (determined under
special rules for non-resident persons).
Tax treaties place restrictions on Canada’s ability to impose Canadian
income tax on non-residents. For
example, article XV(2) of the Canada-US
Tax Convention provides that employment income of a US resident from an
employment in Canada will not be taxable in Canada if the remuneration does not
exceed CDN $10,000 in the calendar year.
To take advantage of this provision, the US resident must apply for and receive
an R102-R or R102-J waiver. Such waivers
must be obtained in advance and are issued at the discretion of the Canada
Revenue Agency.
Tax Act imposes tax on the taxable income of a non-resident person who was
employed in Canada at any time in the year or a previous year (determined under
special rules for non-resident persons).
Tax treaties place restrictions on Canada’s ability to impose Canadian
income tax on non-residents. For
example, article XV(2) of the Canada-US
Tax Convention provides that employment income of a US resident from an
employment in Canada will not be taxable in Canada if the remuneration does not
exceed CDN $10,000 in the calendar year.
To take advantage of this provision, the US resident must apply for and receive
an R102-R or R102-J waiver. Such waivers
must be obtained in advance and are issued at the discretion of the Canada
Revenue Agency.
Under the above example, the US resident will
be required to file a Canadian income tax return to recover any tax overpaid if
he or she is entitled to an exemption under the Canada-US Tax Convention, but a waiver is not obtained. A US resident seconded to a Canadian
Receiving Employer will also be required to file a Canadian income tax return
if he or she has tax payable for the calendar year. The return is due by April 30 of the
following year.
be required to file a Canadian income tax return to recover any tax overpaid if
he or she is entitled to an exemption under the Canada-US Tax Convention, but a waiver is not obtained. A US resident seconded to a Canadian
Receiving Employer will also be required to file a Canadian income tax return
if he or she has tax payable for the calendar year. The return is due by April 30 of the
following year.
Where a seconded employee is subject to
Canadian income tax on his or her employment income earned in Canada and is not
able to access a tax treaty exemption from Canadian income tax, the employee may
be entitled to receive foreign tax credits in his or her home country. Foreign tax credits are used to avoid double
taxation of the same income, i.e.,
Canadian taxation on the income and then home country taxation on the same
income.
Canadian income tax on his or her employment income earned in Canada and is not
able to access a tax treaty exemption from Canadian income tax, the employee may
be entitled to receive foreign tax credits in his or her home country. Foreign tax credits are used to avoid double
taxation of the same income, i.e.,
Canadian taxation on the income and then home country taxation on the same
income.
CPP Contributions
“Social security totalization agreements”
restrict Canada’s ability to require CPP contributions from the Canadian-source
employment income of non-residents. For
example, the Agreement between the Government of Canada and the Government of
the United States of America with Respect to Social Security exempts US
residents from having to make CPP contributions on Canadian-source employment income
in certain circumstances. The US
resident must be covered under the US equivalent of CPP in respect of work
performed for a US employer who has a place of business in the US, and the US
resident must be required by the US employer to work in Canada. Also, the period of work in Canada cannot
exceed 60 months.
restrict Canada’s ability to require CPP contributions from the Canadian-source
employment income of non-residents. For
example, the Agreement between the Government of Canada and the Government of
the United States of America with Respect to Social Security exempts US
residents from having to make CPP contributions on Canadian-source employment income
in certain circumstances. The US
resident must be covered under the US equivalent of CPP in respect of work
performed for a US employer who has a place of business in the US, and the US
resident must be required by the US employer to work in Canada. Also, the period of work in Canada cannot
exceed 60 months.
A US resident who qualifies under the above
rule must apply for a Certificate of Coverage from the US Social Security
Administration in order to access the exemption.
rule must apply for a Certificate of Coverage from the US Social Security
Administration in order to access the exemption.
EI Premiums
Canadian-source employment income of a
non-resident is not subject to EI deductions if the non-resident’s home country
requires someone to pay unemployment insurance premiums on that income. For example, a US resident seconded to Canada
will generally not have to pay EI premiums provided someone is required to pay
US unemployment insurance premiums on the Canadian-source employment income.
non-resident is not subject to EI deductions if the non-resident’s home country
requires someone to pay unemployment insurance premiums on that income. For example, a US resident seconded to Canada
will generally not have to pay EI premiums provided someone is required to pay
US unemployment insurance premiums on the Canadian-source employment income.
Are the
Reimbursements Subject to GST/HST?
Reimbursements Subject to GST/HST?
In general, a supply of services in Canada
is subject to a 5% GST or a varying rate of HST in participating provinces. The GST/HST could apply to the reimbursement
for the use of the seconded employees paid by the Canadian Receiving Employer
to the Lending Employer.
is subject to a 5% GST or a varying rate of HST in participating provinces. The GST/HST could apply to the reimbursement
for the use of the seconded employees paid by the Canadian Receiving Employer
to the Lending Employer.
However, the Canada Revenue Agency’s
administrative position is that GST/HST will not be payable on the
reimbursement provided the Receiving Employer is considered the employer of the
seconded employees. This is based on the
exemption from GST/HST for supplies of services to an employer by an
employee. Provided the Receiving
Employer exercises control and supervision over the seconded employees, there
should be no GST/HST payable on the reimbursement for the use of the employees. The reimbursement amount should generally be
at cost.
administrative position is that GST/HST will not be payable on the
reimbursement provided the Receiving Employer is considered the employer of the
seconded employees. This is based on the
exemption from GST/HST for supplies of services to an employer by an
employee. Provided the Receiving
Employer exercises control and supervision over the seconded employees, there
should be no GST/HST payable on the reimbursement for the use of the employees. The reimbursement amount should generally be
at cost.
Caution Regarding Reimbursements for
Administrative Overhead Charges
Administrative Overhead Charges
The Canada
Revenue Agency has an administrative position regarding payment to a Lending
Employer of up to $250 per employee per month for overhead costs related to a
secondment. The Canada Revenue Agency’s
administrative position is that such an administrative overhead charge will not
cause the reimbursement (including the administrative overhead charge) paid by
the Receiving Employer to be subject to 15% withholding tax under section 105
of the Income Tax Regulations.
Revenue Agency has an administrative position regarding payment to a Lending
Employer of up to $250 per employee per month for overhead costs related to a
secondment. The Canada Revenue Agency’s
administrative position is that such an administrative overhead charge will not
cause the reimbursement (including the administrative overhead charge) paid by
the Receiving Employer to be subject to 15% withholding tax under section 105
of the Income Tax Regulations.
However, there
appears to be no guidance from the Canada Revenue Agency on whether such an
administrative overhead charge would make GST/HST payable on a reimbursement. It is possible that the payment of an
administrative overhead charge could cause a reimbursement paid by the
Receiving Employer to be subject to GST/HST as a taxable supply of a
service. In other words, the entire
reimbursement composed of salary, benefits, and an administrative overhead
charge could be subject to GST/HST as a supply of a taxable service.
appears to be no guidance from the Canada Revenue Agency on whether such an
administrative overhead charge would make GST/HST payable on a reimbursement. It is possible that the payment of an
administrative overhead charge could cause a reimbursement paid by the
Receiving Employer to be subject to GST/HST as a taxable supply of a
service. In other words, the entire
reimbursement composed of salary, benefits, and an administrative overhead
charge could be subject to GST/HST as a supply of a taxable service.
Guidance on
this issue should be sought from the Canada Revenue Agency prior to an
administrative overhead charge being charged by a Lending Employer to a Receiving
Employer.
this issue should be sought from the Canada Revenue Agency prior to an
administrative overhead charge being charged by a Lending Employer to a Receiving
Employer.
If you would
like more information on this article please contact the authors of this
posting, Cheryl Teron at (604) 643-1286 or cteron@millerthomson.com or Stephen
Rukavina at (604) 643-1277 or srukavina@millerthomson.com
like more information on this article please contact the authors of this
posting, Cheryl Teron at (604) 643-1286 or cteron@millerthomson.com or Stephen
Rukavina at (604) 643-1277 or srukavina@millerthomson.com
If you would
like specific legal advice based on your particular circumstances, please
contact one of the following lawyers at Miller Thomson LLP:
like specific legal advice based on your particular circumstances, please
contact one of the following lawyers at Miller Thomson LLP:
William Fowlis
Calgary, National Leader
wfowlis@millerthomson.com
Calgary, National Leader
wfowlis@millerthomson.com
Cheryl Teron
Vancouver
ctern@millerthomson.com
Vancouver
ctern@millerthomson.com
Joseph W.
Yurkovich
Edmonton
jyurkovich@millerthomson.com
Yurkovich
Edmonton
jyurkovich@millerthomson.com
Crystal Taylor
Saskatchewan
cltaylor@millerthomson.com
Saskatchewan
cltaylor@millerthomson.com
James
Hutchinson
Toronto
jhutchinson@millerthomson.com
Hutchinson
Toronto
jhutchinson@millerthomson.com
Nathalie
Marchand
Montreal
nmarchand@millerthomsonpouliot.com
Marchand
Montreal
nmarchand@millerthomsonpouliot.com
