So, you’re a Canadian who decides to move to the Sunshine State. At this point in the season – that season being “not winter, but also not spring” – it’s something I think about every day. However, if you’re a Canadian who: 1) Flew south for more than just the winter; 2) Is a resident of California; and 3) holds RRSPs, LIRAs, RRIFs or other Canadian tax-deferred accounts, you need to read this.
The Canada-US Income Tax Convention or “tax treaty”, provides a tax deferral for RRSP and similar retirement accounts until the time of withdrawal. Essentially, giving Canadian retirement plans the same tax treatment as US Individual Retirement Accounts (IRAs). But not every state follows federal tax treaties. California is a state that does not abide by federal tax treaties. According to the California State Franchise Tax Board (FTB), your RRSP is…well…more like a savings account. Translation – the income and capital gains are taxable in the year earned!
The IRS has issued Revenue Procedure 89-45 which provides guidance with respect to why, under US domestic tax law, RRSPs, LIRAs and RRIFs are not considered to be the same as US IRAs. This particular procedure goes on to explain that, in fact, the earnings from this type of plan should be reported as part of your gross income on your US tax return. Of course, this is before considering Income Tax Treaties.
In summary, a California resident must include any earnings from their RRSP in their taxable income and pay taxes in the year it is earned. There is an upside. (Finally!) But one would need to have good bookkeeping skills to take an advantage of it. After tax is paid on these earnings, the earnings will also be treated as capital invested in the RRSP, for California tax purposes. When a taxpayer receives a distribution from their RRSP, the amount of the contributions and the previously taxed earnings is considered a nontaxable return of capital for the California purposes. However, the withdrawal will be taxable federally, meaning an adjustment will be required state-side to avoid double-taxation
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.
Business Travelers and Employees on International Assignments
Many Canadian business owners either personally go or send their employees on business trips to the US often forgetting that such movements can unintentionally trigger taxation requirements, particularly in the areas of employment and social security taxes. In addition, workforce border-crossing activities can increase the company’s exposure to US federal and state taxation at a corporate level. Finally, an extended business travel can spill over into the area of immigration, with local government barring that employee from future visas and even blocking the entire firm from receiving visas.
Similar issues exist on the flip side, when foreign nationals come to provide services in Canada even on short-term basis.
With increased business globalization and a desire to boost tax revenue on the part of the taxing authorities, it is important to be cognizant of the tax and other compliance-related issues to minimize any potential risk to both the employees and the company. We can assist you with both the advance planning as well as an annual tax compliance maintenance.