U.S. companies that temporarily station workers in Canada are finding it hard to avoid that nation’s withholding tax, and delays in obtaining waivers from it may be hurting the Canadian economy, tax preparers say.
Under an income tax treaty between the two countries, U.S. businesses that don’t have a “permanent establishment” in Canada are exempted from a 15 percent withholding tax on employees working there on a temporary basis. The companies must obtain tax waivers from the Canada Revenue Agency in advance, though, and that process is proving increasingly difficult, Bloomberg BNA reports.
The snags in receiving the waivers come as the global workforce is more mobile, with information-technology businesses and other industries moving employees around the globe.
Issuance of the waivers, which were created to try to assist businesses, has been slowing, particularly over the past two months or so, Lorna Sinclair, a tax partner and global services leader in the Toronto office of Deloitte & Touche LLP. Sinclair said in an interview.
“It was meant to make the whole process of getting employees into Canada easier,” she said. “But what we’re finding is that taxpayers are now getting notices that their waivers have been denied. Nothing’s getting approved.”
The upshot is that the U.S. companies face having to withhold the tax and then file Canadian returns to get the money back later. Along with information-technology businesses, affected industries include global engineering companies, said Bruce Reynolds, a Bloomberg BNA tax and accounting analyst.
The private sector is working with the CRA to address the concerns about the process, according to the tax preparers interviewed by Bloomberg BNA.
CRA spokesman Philippe Brideau said in an e-mail that the office “will continue to look at other potential changes to streamline the waiver process for nonresident employees.”
He didn’t comment further on any talks with U.S. company officials.
Canadian officials “really are working on this issue, but they’re coming up with inappropriate solutions,” Sinclair said.
Companies may not realize that the withholding obligation starts from a worker’s first day and affects even business travelers, said Fatima Laher, also a tax partner in the Toronto office of Deloitte & Touche LLP.
Employers are subject to withholding for employees going for site visits, workers on short-term projects and even executives flying into Canada for business meetings, Laher said.
“It really comes as a surprise to many employers,” she said. “Compliance with the rules is not intuitive. There is an explanation needed of what it means any time an individual crosses the border. A lot of people think, ‘I’m exempt under the treaty, I don’t have to withhold.’ We’re finding we have to educate a lot of businesses coming into Canada.”
Tax preparers said the withholding rules may be hurting Canada’s ability to attract business from other countries.
“The key issue is that the Canadian tax rules are getting in the way of foreign companies doing business in Canada,” Sinclair said.
Dan Fontaine, an international tax services partner with PricewaterhouseCoopers LLP in Toronto, said that companies “want to be good corporate citizens, but the rules are so unwieldy and difficult to comply with that it puts them in a tough spot.”
Referring to the talks with the CRA, Fontaine said, “The only thing we’ve heard consistently is, ‘We understand your frustration, we understand there are problems and we’re studying the issue to see if there’s anything we can do about it.’ It’s been the same thing for three years.”
He said he believes pressure needs to come from the U.S. to get the Canadian government to respond.
“This has to be fixed at a very high level,” Fontaine said. “Right now, companies are effectively forced to deal with the bureaucrats to get treaty benefits to effectively apply. It slows everything to a crawl.”
Sinclair said her “best guess” as to why the CRA seems to have changed its waiver approval process is that it is considering a new test to determine whether employees are exempt under the treaty.
The CRA’s Brideau told Bloomberg BNA on Nov. 27 that the agency “is not currently working on developing such a test.”
Regardless, said Sinclair, the agency is “missing business reality. They’re not understanding the corporate tax issues.”
The agency has made a point of asking companies to write in and give them feedback on the current process, Sinclair said. “Most clients are not very receptive to writing letters like that to CRA. They’re too worried about backlash” spurred by their complaints, she said.
Faced with these issues and the need to hire professional services firms to help them with taxes, employers may increasingly choose to take their business out of Canada, Sinclair said.
“It’s a huge problem if you have hundreds of waivers denied,” she said. “You are forced to do withholding and remit taxes to the Canadian government. You have to set up a tax return program in Canada. The alternative for these employers is just to walk away.”
Ronald Nobrega, a partner in the Toronto office of business law firm Fasken Martineau DuMoulin LLP, said dealing with the CRA can be a guessing game.
“You never know quite what they’re going to ask,” he said. “The guidelines are out of date. Compliance can be burdensome and costly.”
He said advance planning is a necessity. “If people don’t get the waivers in advance and don’t do withholding, it can result in penalties and the administrative costs of doing withholding after the fact,” Nobrega said.
Laher said Canada’s reputation as a valued location for business meetings and executive conferences may be changing because of the snarls surrounding the withholding rules.
“Canada’s not becoming the location of choice,” Laher said. “As a proud Canadian, I don’t like that.”
Laher said the ideal would be a streamlined process that would allow employers to self-certify in order to qualify for the waivers.
“We’re not saying that the government should give our clients carte blanche to do what they want,” she said. “Ninety-nine percent of the companies I work with strive to be compliant. I think they just want more flexibility in the process.”
The Canadian Chamber of Commerce last year urged the government to ease “very onerous” withholding and reporting requirements for nonresident workers. The current rules, the business lobby group said, “are severe deterrents to allowing Canadian organizations to effectively compete for global resources.”