Published: August 4, 2021
Last Updated: August 4, 2021
CRA Has Modified Rules for the COVID-19 Pandemic
Along with various COVID-19 relief programs introduced by the government, the Canada Revenue Agency (“CRA”) has announced policy changes to limit Canadian taxpayers and others experiencing unexpected changes to their taxes due to the pandemic.
For example, individuals who have established sufficient residential ties with Canada in a tax year or “sojourned” in Canada for more than 183 days are generally considered Canadian tax residents subject to tax treaty tie breaker rules and liable for Canadian tax on their worldwide income. However, many individuals experienced unexpectedly long stays in Canada or elsewhere due to pandemic travel restrictions. These individuals may have established residential ties in Canada, like a home in Canada, simply to facilitate their extended stay until borders reopened. The CRA has issued guidance that if an individual has remained in Canada solely because of pandemic related travel restrictions, that factor alone will not cause the CRA to consider that individual to be a Canadian resident.
Taxpayer should note the changes are just to CRA policy and not the law. How these policy changes will play out in practice is not yet known. For instance, the CRA has not defined what it would consider a sufficient level of travel restrictions to have the above-mentioned guidance applied to the taxpayer.
Employment Income for US-Canada Employees
The United States-Canada Tax Treaty sets out which country can tax Canadian or United States tax residents including in respect of employment income earned from either the United States or Canada.
A Canadian or United States tax resident who derives their employment income from an American source and exercises their employment in the United States will only have taxes from the United States imposed on their income. Similarly, a Canadian or United States tax resident who derives their employment income from a Canadian source and exercises their employment in Canada will only have taxes from Canada imposed on their income.
Employees may face taxation in both Canada and the United States if they work or “exercise their employment” in the country where their employer is not resident and does not have a permanent establishment or fixed base. Taxation from both countries applies where the employee earns more than $10,000 in employment income from their employer and the employee is present for more than 183 days in the year in the country where their employer is not resident and does not have a permanent establishment or fixed base. Foreign tax credits will be available in Canada or the United States to reduce or eliminate any resulting double taxation.
These rules also vary if the employee works on a ship, aircraft, motor vehicle or train in more than one country.
COVID-19 Changes to Employment Income for US-Canada Employees
In April, the CRA announced reporting policy changes for the 2020 taxation year for Canadian-resident individuals who work for American employers and would ordinarily work or “exercise their employment” in the United States, if not for COVID-19 travel restrictions. Similar changes may apply for the 2021 taxation, but nothing has been announced as of the writing of this article. These individuals will need to use one of the following two approaches.
This approach is for taxpayers who have reported American employment income in previous tax years and continued to have income withheld as if they had worked in the United States in 2020. These employees can file their 2020 Canadian tax returns as they did in previous years and claim the appropriate foreign tax credits. If the employee is ever refunded the American tax withheld, wholly or in part, the employee will need to amend their Canadian tax return to adjust the foreign tax credits paid.
For taxpayers who cannot utilize the previous –year approach, the rules under the treaty must be used. The taxpayer will report the American source employment income in Canada and claim foreign tax credits on any US taxes paid if applicable. The CRA has indicated they are willing to waive late payment penalties where the taxpayer is awaiting a refund of taxes withheld on the US income and uses those withheld amounts to pay their Canadian tax balance.
The CRA has also announced relief for American tax resident employees working in Canada for the 2020 taxation year. When calculating whether these individuals stayed in Canada for more or less than 183 days in the 2020 taxation year, per the test under the US-Canada tax treaty discussed above, the CRA will not count days the individuals could not return to the United States solely because of pandemic travel restrictions. At present, the CRA has indicated this relief will not apply for the 2021 taxation year.
Pro Tax Tips: Applying for a Residence Determination
When dealing with cross border taxation, there are two factors which impact where the taxpayer’s income is taxed. Where the taxpayer is a tax resident and the location of the source of the taxpayer’s income. In determining whether an individual is a tax resident of Canada, his or her residential ties to Canada are considered. None of these factors are individually determinative but are instead weighed together to determine residence.
The primary factors, those that have more weight in the determination of an individual’s residence, are: home in Canada, spouse or common-law partner in Canada and dependents in Canada. Secondary factors include driver’s license in Canada, maintaining a Canadian passport, bank accounts in Canada and social ties to Canada. Canada additionally has entered into numerous tax treaties most of which contain “tie-breaker” rules for residence when a taxpayer is considered a tax resident of both countries.
Canada taxes all residents of Canada on their worldwide income. Non-residents of Canada for tax purposes are taxed solely on their Canadian-source income. The income subject to Canadian taxation may also be varied by tax treaties as discussed above.
An individual can retain our experienced Canadian tax lawyers to determine their tax residence either by drafting a legal memorandum or filing a residence determination to obtain a non-binding opinion on the individual’s tax residence from the CRA. Once we have determined your tax residence, our experienced Canadian tax lawyers can advise you on how policy changes due to COVID-19 may impact your tax reporting requirements.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Frequently Asked Questions
- Your tax residence
- Where you exercise your employment
- Your employer’s tax residence
- Where your employer has a permanent establishment or fixed base
- The amount of your employment income
- Which country you are present in for more than 183 days
The Canada Revenue Agency is, at present, taking the position that the days a US tax resident individual remained in Canada solely due to pandemic travel restrictions will not be considered when calculating the 183-day period under the US-Canada tax treaty for the 2020 taxation year.
Tax treaty tie-breaker rules refers to the rules contained in many of Canada’s tax treaties which determine an individual who is otherwise a tax resident of both treaty countries to be a tax resident of only one treaty country. For more on the tie-breaker rules, see our article Tax Treaty Residence Determination: Canadian Tax Lawyer Guide.