Transferring employees between members of a corporate group can be an effective way to leverage expertise, promote existing corporate culture, transition business units and develop new markets. To ensure that the benefits are realized, it is important that an employee transfer comply with employer payroll obligations and employee entitlements and obligations under applicable legislation, as well as take into account the tax and other implications for all of the parties involved.
In the domestic context, employee transfers between employers in a corporate group (hereinafter referred to as the “sending employer” and the “receiving employer”) are generally straightforward provided the transfers are properly documented, necessary adjustments to payroll and human resource services of the sending and receiving employers are made and continuity of employment between the sending and receiving employers is preserved with respect to Canada Pension Plan contributions and Employment Insurance premiums. However, the planning and implications can be more complicated when an employee is transferred to a foreign jurisdiction.
It is not uncommon for businesses operating in Canada and looking to expand in another country to send one or a group of existing employees to a foreign jurisdiction to assist in establishing the new business. Similarly, businesses looking to expand into Canada will often send employees to Canada to assist in starting up the new Canadian business. While a review of all of the relevant issues is beyond the scope of this article, there are three important tax considerations to be kept in mind whenever an employer transfers an employee to a related employer in another jurisdiction:
- Will the exercise of employment services in the jurisdiction where the receiving employer is located result in the sending employer being considered to have a permanent establishment in that jurisdiction?
- What are the payroll tax implications for the employer and employee?
- Do any of Canada’s bilateral treaties dealing with social security or unemployment insurance apply?
Secondment Agreements to Mitigate Permanent Establishment Risks for Sending Employer
Generally, a non-resident corporation carrying on business in Canada or a Canadian resident corporation carrying on business in a foreign jurisdiction will not be subject to tax in that jurisdiction provided their activities and presence are not considered to constitute a permanent establishment in the other country and the non-resident corporation or Canadian resident corporation, as applicable, is entitled to the benefits of a tax treaty between Canada and that other country. This is an important advantage of dealing with treaty jurisdictions.
In general, the mere fact that a corporation resident in one jurisdiction controls or is controlled by a corporation resident in another jurisdiction does not amount to either corporation being a permanent establishment of the other for tax treaty purposes. With that said, it is important that dealings between such related corporations be clearly established and their respective activities formally delineated so that treaty benefits are preserved and neither corporation inadvertently comes within the tax net of the other country’s jurisdiction – this is particularly highlighted in the case of employee transfers.
The threshold for having a permanent establishment in another country will generally be met under most of Canada’s bilateral tax treaties if the employee has, and habitually exercises in the other country, an authority to conclude contracts and bind their employer in that foreign jurisdiction. To address this issue and mitigate the related tax risks, it is critical for both the sending and receiving employers to set out the parameters of the employee transfer.
For these purposes, the sending and receiving employers can enter into a secondment agreement providing, among other things, for:
- What position and responsibilities will the transferred employee have?
- For whom will the employee be exercising employment services?
- Where will employment services be rendered?
- During which periods will the employee be considered to be providing employment services in one jurisdiction as opposed to the other?
A secondment agreement also provides the opportunity for the respective employers to determine their responsibilities including administering payroll, providing office space and equipment, ensuring compliance with applicable laws and insuring against liability.
Tax implications for the Employer and Employee
From the sending and receiving employers’ perspective, the tax implications may involve, among other things, withholding and remitting payroll taxes and other amounts to the relevant taxing authority in the other country, filing tax and information returns and other compliance obligations in the other country, as well as determining whether the sending employer has a permanent establishment in the other country for tax treaty purposes as discussed above. From the employee’s perspective, the tax implications may include, among other things, filing a tax return and paying taxes in the other country, claiming foreign tax credits, and determining the employee’s residency for tax purposes. It is important that tax and legal advice in both Canada and the relevant foreign jurisdiction be obtained.
Canada’s Bilateral Social Security and Unemployment Insurance Treaties
In addition to tax treaties, Canada has a network of bilateral treaties that deal with the interactions, obligations and entitlements with respect to contributions and payments to social security and unemployment insurance programs that may apply to a transferred employee’s employment in Canada or in another country. Applicable treaties should be reviewed to ensure that payments are not needlessly being made to programs in both jurisdictions and that existing program entitlements will not be adversely affected as a result of the transfer.
Sending and receiving employers and transferred employees should consult with their tax and legal advisors in Canada and the relevant foreign jurisdiction in order to become apprised of the various tax, employment, emigration, immigration and other implications of the transfer before sending an employee to another jurisdiction.