Regulation 102: Tax implications for U.S. employees working in Canada
Regulation 102 of the Canadian Income Tax Act requires employers to withhold 15% tax on payments made to nonresident employees for services rendered in Canada. If services are performed in Quebec, there’s an additional 9% withholding.
However, treaty provisions between Canada and the U.S. may circumvent this withholding requirement. Certain conditions allow U.S. employees to perform services in Canada and for the remuneration to only be taxable in the U.S.
To meet these conditions, you must obtain a Regulation 102 waiver. In addition:
- Remuneration cannot exceed $10,000 USD in any calendar year or
- The U.S. employee cannot be present in Canada for more than 183 days in any 12-month period (commencing or ending in the fiscal year in question).
Canadian residents and those with permanent establishment do not get the benefit of the deduction.
Who qualifies for the Regulation 102 deduction?
There are some exceptions to the criteria above. The 183-day rule would not apply if the tax deduction for the services performed in Canada would be assumed by Canadian permanent establishment, directly or indirectly. In this case, the $10,000 salary threshold would be the lone condition applied to determine whether the employee is subject to Canadian income taxes.
It’s important to note: The 15% withholding is not the definitive tax; rather, it’s an installment towards the final tax liability.
How to apply for a Regulation 102 waiver
If remuneration is not expected to reach $10,000 USD, then employers should file a Regulation 102 waiver application with the Canada Revenue Agency (CRA) prior to sending people to Canada.
Employers must file the application on behalf of their employees at least 30 days prior to rendering services in Canada. The application should outline why Regulation 102 does not apply.
Employers should also document earned income in Canada and the time employees spend performing services in Canada. Then, they can evaluate whether withholding will be required, considering any potential change in service time expectations.
For payments made after January 1, 2016, companies can apply to become a certified nonresident employer. Approval would eliminate the need for a waiver for each employee traveling to Canada. Certification is good for two years and requires employers to track and record the activity of each employee traveling to Canada and their standing as a qualified nonresident employee. This application must also be filed at least 30 days prior to any services provided in Canada.
Waiver applications can be challenging, so some employers prefer to withhold on all employees traveling to Canada, regardless of the time they’re expected to spend in Canada. In this case, if the $10,000 USD threshold is not reached, a Canadian tax return could be filed on behalf of the employee to request a refund of the entire withholding.
What happens if an employee is subject to Canadian withholding?
If withholding is required, the employer will need to file for:
- A Canadian business number with the CRA and
- A certificate of coverage from the U.S. Social Security Administration office on the employee’s behalf.
A certificate of coverage allows the payroll provider to not withhold earnings for the Canadian pension plan and Canadian employment insurance, which is required of Canadian residents. The employee will then need to file a personal Canadian income tax return.
Most likely, payment of the withholding tax and filing of a Canadian tax return will allow the nonresident to claim a foreign tax credit on their personal U.S. tax return.
What happens if a U.S. employer fails to withhold Canadian tax?
The CRA is very diligent about its governance of withholding tax requirements. If a failure to withhold is identified, the employer becomes responsible for the entire withholding requirement (including the employee’s share), plus significant interest and penalties.
How Wipfli can help
Our international tax specialists understand filing and withholding requirements around the world. We can help you track multinational requirements, prepare and file international tax forms, and avoid and mitigate penalties. Contact us to learn more.
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