Business Travelers
This article was originally published on Jan. 24 2019 by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

According to the most recent Statistics Canada report on the subject (2010), more than 1.7 million Canadians worked from home in 2008 at least once a week, an increase of almost 23 per cent from 1.4 million in 2000. Certainly, this number has continued to grow and many of those Canadians working from homeoffices are working for American companies.

In legal terms, we call them “remote” workers, and this type of an arrangement is becoming more popular in the global digital economy. However, it can create a lot of issues on both sides of the border, and there are many misconceptions out there.

With ongoing advancement in technology, countless people are able to work this way easily and efficiently. For employers, the benefits of having a remote workforce include cost savings, access to a larger pool of talent, reduced turnover and the ability to offer better work-life balance, allowing for the recruitment and retention of top talent. Employees spend less time commuting and more time doing what they enjoy. They also have the flexibility to deal with personal obligations without sacrificing their work.

These arrangements have many benefits for both parties. However, hiring workers who do not reside or work in the country, state or province where the employer is located can give rise to unforeseen risks by overlooking certain areas, such as payroll, classification of the relationship and several other tax considerations.

Payroll systems in the U.S. and Canada are similar, but there are important differences. While both countries have a social security regime, it is important to know which regime applies to a remote employee. If an employee is working on Canadian soil, regardless of where the employer is physically located, the employee is covered under the Canada Pension Plan (CPP). This means the U.S. employer must withhold from the employee and remit CPP contributions to the Canada Revenue Agency (CRA), including the employer’s portion of CPP.

This can become complicated because U.S. social security is more expensive than CPP. In 2019, maximum Social Security taxes are US$8,239.80 (6.2 per cent of maximum earnings $132,900). In contrast, CPP has a maximum annual contribution limit of $2,748.90 (5.1 per cent of maximum earnings of $57,400).

Employees will also pay into U.S. Medicare at a rate of 1.45 per cent of earnings up to $200,000 and 2.35 per cent thereafter, with no annual limit. If the employee does not contribute to U.S. Social Security for at least 40 quarters (i.e. 10 years), they will not receive benefits from the U.S. Social Security program, and coverage under Canada’s employment insurance program would not be available as premiums would not be paid into the program.

It is important to note that even if the employer does not have a Canadian branch, keeping the remote employee on U.S. payroll would be considered negligent in terms of Canadian payroll legislation. In addition to payroll taxes, income taxes are required to be withheld from all Canadian resident employees and any  employee rendering services on Canadian soil. These taxes must be remitted on a timely basis to the CRA, otherwise a penalty of 10 per cent of the balance that should have been withheld will be charged to the employer. Since the employee is not rendering services on U.S. soil, no U.S. taxes are required. However, if an employer insists on keeping the employee on U.S. payroll, the employee must obtain a U.S. Social Security number and file a U.S. tax return, which will be problematic if there is not a valid work visa issued to the employee.

Assuming the employee is using the U.S. refund to fund Canadian taxes due, there could be a cashflow problem if the refund isn’t received prior to the Canadian payment due date. Further cashflow issues arise in the following year, when the employee is required to make quarterly instalment payments to the CRA and has taxes withheld in the U.S. There is even greater complexity when the employee works in both the U.S. and Canada.

A common workaround is for employers to classify workers as “independent contractors.” While it may avoid withholding and reporting obligations for the remote worker, it could be very costly if either the IRS or CRA determines that there is an employment relationship. For U.S. employers, if the remote worker is classified as an employee, local employment law will prevail. This means the at-will employment standard in most U.S. states is replaced with Canadian provincial labour standards (i.e., wrongful termination, retroactive vacation and overtime pay, not to mention fines and penalties).

The bottom line is this: If you already have an employee working in another tax jurisdiction, you must consider whether you are subject to taxes such as corporate income tax, sales and local taxes, workers compensation premiums and the list goes on.

If you are considering a remote employment arrangement, educate yourself and fully understand your tax obligations. Compliance planning for these issues is important to do upfront, or you may have a situation on your hands once it’s time to file annual tax returns.

 

 

IRS

With the United States government shutdown in its fifth week — the longest government shutdown in U.S. history — its effects are beginning to take a toll on those north of the border.

For Canadians with financial interests in the U.S., the shutdown of non-essential government agencies such as the Internal Revenue Service may prove to be more than just a minor inconvenience.

Azam Rajan, lawyer and director of U.S. tax law at Moodys Gartner Tax Law in Calgary, says the “procedural snafu” created by the shutdown of the IRS can mean higher than anticipated costs and complications during the upcoming tax season that may stifle cross-border investment.

Transactions involving Canadian sellers of U.S. real estate are being delayed as well, as non-residents are typically required to abide by the Foreign Investment in Real Property Tax Act. The law requires non-residents to withhold 15 per cent of the sale price as tax, Rajan says. However, sales resulting in a net profit loss are not subject to taxation and the seller is permitted to obtain that money back from escrow, but only through the submission of a withholding certificate from the IRS.

“Unfortunately, now that money is being held in the escrow agent’s office and they then are required to submit it to the IRS,” Rajan says. “You now have to file a tax return with the IRS to get the money back and this is the wrong way of doing it.”

Elena Hanson, founder and managing director of Hanson Crossborder Tax, says that since the shutdown of the IRS on Dec. 22, taxpayers and tax practitioners with past or future U.S. tax obligations have been unable to access services that may be required to comply with Canada Revenue Agency regulations such as notice of assessments for past foreign tax credits.

Given the duration of the shutdown, many of these concerns are expected to continue once the IRS commences operations for the upcoming tax season on Jan. 28. The IRS Lapsed Appropriations Contingency Plan stipulates that only 57.4 per cent of furloughed workers will be retained, leading to immense and inevitable backlog.

“During normal operations, there were a lot of inefficiencies. It typically takes somewhere from half an hour to two hours if you want to address an inquiry over the phone with an agent,” Hanson says. “We cannot even imagine how long it’s going to take to ask a question.”

The subsequent backlog may lead to a delay in returns that will extend far into 2019, Hanson says, and cause some Canadians to file late with the CRA if they choose to wait for the funds from U.S. returns to finance CRA tax payments.

As of this moment, Hanson says she is not aware of any accommodations the CRA plans to make for those filing abroad. However, she says, in the past, they have been quite lenient.

“This is a major hurdle for everyone affected and, unfortunately, we don’t have control or we don’t have any other options,” Hanson says. “We just have to wait and be organized once the revenue services are back to normal or semi-normal.”

Marsha Dungog, also a director of U.S. tax law at Moodys Gartner Tax Law, says the IRS shutdown can affect Canadians on a more personal level as well. A few years prior, the U.S. began a controversial passport revocation program in which individuals owing more than $50,000 in taxes would have their U.S. passports revoked by the Department of State when crossing the border and not returned until payment was made, Dungog says.

There is currently no staff available to either process payments owed or contact the State Department for re-certification of the passport, which severely hampers the ability of those individuals to travel for either business or personal reasons, Dungog says.

A lack of staff may also impact lawyers with clients involved in the tax appeal process.

“Lawyers dealing with the IRS already on what we call appeals or higher-level administrative review of the file for their clients, all the correspondences are going to get delayed because there are no actual IRS personnel there to answer,” Dungog says. “The IRS was supposed to be rescheduling, but they don’t know when they’re going to open.”

As those delays in appeals endure, not only do penalties and interest continue to accrue but individuals may be subject to tax liens imposed through the IRS’s functioning automated system, Dungog says. Although these are remediable conditions, Dungog anticipates they would require a “Herculean effort” to amend once the IRS is up and running.

“We’ll just have to learn how to deal with uncertainty for now on both sides of the border,” she says.

Written By Julia Nowicki
Source CanadianLawyer article published January 23,2019

The Canadian government has shared more than 1.6 million Canadian banking records with the U.S. Internal Revenue Service since the start of a controversial information-sharing agreement in 2014, CBC News has learned.

In 2016 and again in 2017, the Canada Revenue Agency provided the IRS with information on 600,000 Canadian bank accounts each year. That’s a sharp increase from the 300,000 records shared in 2015 and the 150,000 records shared in 2014, the year the sharing began.

However, that doesn’t necessarily correspond to the number of people affected. Some people may have more than one bank account, while some joint accounts could have more than one account holder — including people who don’t hold U.S. citizenship.

Among the items of Canadian bank account information being shared with the U.S. are the names and addresses of account holders, account numbers, account balances or values, and information about certain payments such as interest, dividends, other income and proceeds of disposition.

The information transfer is the result of a controversial information sharing agreement between Canada and the U.S. negotiated in the wake of the American government’s adoption of the Foreign Account Tax Compliance Act (FATCA). The act, adopted in a bid to curb offshore tax evasion, obliges foreign financial institutions to report information about accounts held by people who could be subject to U.S. taxes.

The Canadian government argued that negotiating the information-sharing agreement would be better than forcing Canadian banks to deal directly with the IRS. Under the agreement, Canadian financial institutions send information on accounts held by clients with U.S. indicia (such as the account-holder being born in the United States) to the CRA; once a year, the CRA then forwards the information to the IRS.

In return, the IRS is supposed to send the CRA information about U.S. bank accounts held by Canadians. The CRA, however, has repeatedly refused to reveal how many records, if any, it has received from the IRS as a result of the agreement.

Nor does the CRA automatically notify Canadian account holders when their information is transferred to the U.S., said CRA spokesman Etienne Biram.

“There is no legislative requirement to disclose this information,” he wrote. “However, if requested by a taxpayer, the CRA will confirm whether information relating to a particular individual or entity has been reported and provided to the United States of America under FATCA.”

The CRA said the increase in the number of records transferred from one year to the next was expected because certain financial accounts did not have to be reported during the first two years of the agreement.

The revelation that 1.6 million records have been shared with the U.S comes as the Federal Court of Canada prepares to hear a constitutional challenge of the information-sharing agreement next week in Vancouver.

Those challenging the agreement argue that it violates sections 7, 8 and 15 of Canada’s Charter of Rights, which protect Canadians from violations of their right to life, liberty and security, unreasonable search and seizure and discrimination against those who hold U.S. as well as Canadian citizenship.

In its submission to the court, the plaintiffs argue that some of the people whose banking records have been shared with the IRS may not be subject to U.S. taxes.

The government, however, presents the information-sharing agreement as the lesser of available evils and an attempt to mitigate the potential impact of FATCA, which included a potential 30 per cent withholding tax on institutions that didn’t comply.

“There were potentially severe consequences to the Canadian financial sector, its customers and investors, and to the Canadian economy as a whole if Canadian financial institutions were unable or unwilling to comply with FATCA,” wrote the government in its submission to the court.

“Canada sought to avoid those consequences and at the same time obtain less burdensome compliance rules for Canadian financial institutions and their customers, and additional information from the United States for Canadian tax compliance purposes.”

The government argues the deal doesn’t violate any charter rights — and that even if it does,  it is a reasonable limit on those rights given what was at stake. It also points out that close to 100 countries have negotiated similar deals with the U.S. in the wake of FATCA.

Stephen Kish is a member of the Alliance for the Defence of Canadian Sovereignty, which mounted the legal challenge. He questioned how many of those records should have been shared.

“It’s a huge number of accounts. What our lawyers are trying to find out is how many of those accounts were those of Canadian citizens, how many of those accounts were, in fact, U.S. persons, how many of those accounts should not have been sent because they didn’t achieve the correct account balance.”

Conservative Revenue Critic Pat Kelly said sharing banking records with the IRS has increased the number of Canadian residents at risk of being hit by the repatriation tax signed into law by U.S. President Donald Trump in December 2017. The tax has hit thousands of Canadian residents with U.S. or dual citizenship and a company incorporated in Canada.

“The information sharing agreement … helps facilitate giving the IRS a target list in Canada,” he said. “The Canadian government has to respect Canadians’ privacy and be aware of all of these consequences.”

NDP Revenue Critic Pierre-Luc Dusseault said the CRA should proactively notify Canadian bank account holders when information about their accounts is transferred to the U.S.

“The CRA should do its job of informing their citizens, the taxpayers of Canada that they are taking their personal banking information and transferring it to a foreign country. This is the bare minimum and it shows again the lack of transparency of this government.”

Written by Elizabeth Thompson  elizabeth.thompson@cbc.ca