Mr. Speaker, with respect to the above-noted question, what follows is the response from the Canada Revenue Agency, or CRA, and represents its general interpretation of the relevant provisions of the Income Tax Act and of the Canada-U.S. tax treaty. This may not be determinative of the tax treatment of a specific taxpayer’s situation.
With respect to part (a), the CRA is interpreting the question to mean employment income of an individual resident in Canada, and such employment income is earned, or sourced, where the related duties are actually performed. This is consistent with the situation where a non-resident of Canada travels to Canada and works here, even on a temporary basis. In either case, the employment income could be considered sourced in Canada if the duties of employment are performed here.
The Canadian resident employee will be earning employment income in Canada, and therefore the U.S. company faces Canadian payroll withholding requirements even if it does not have a permanent establishment in Canada. The employee may be able to obtain a letter of authority from the CRA to authorize the U.S. employer to reduce the Canadian deductions at source to take into account the anticipated foreign tax credit. To get a letter of authority, the employee has to send form T1213, the request to reduce tax deductions at source, or a written request to the Sudbury tax centre.
With respect to part (b), a non-resident employer is subject to Canadian income tax and has to file a tax return if, at any time in the year, the non-resident employer carries on business in Canada. Generally, Canada's tax treaties provide that only business profits attributable to a Canadian permanent establishment will be subject to Canadian income tax.
A permanent establishment of a non-resident corporation is defined under the Canada-U.S. tax treaty to include “a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on”. In this case, it is the U.S. In making a determination of whether or not the home of a commuter constitutes a permanent establishment of the U.S. corporate employer, the factors outlined in the commentary on the Organisation for Economic Cooperation and Development, or OECD, Model Tax Convention on Income and on Capital, or OECD commentary, and derived from jurisprudence are to be taken into account.
If the home office is not at the disposal of the non-resident employer and if the employee is not required by the employer to work at the home office, the use of such home office to carry out employment duties, in and of itself, would generally not constitute a permanent establishment of the U.S. corporate employer in Canada. As indicated in the OECD commentary, the use of a home office does not typically mean that it is at the disposal of the non-resident employer.
In the interest of completeness, it should be pointed out that a corporation resident in the U.S. may also have a permanent establishment in Canada as a result of certain activities carried out by its employees, irrespective of whether these activities are carried out at a home office or elsewhere in Canada.
With respect to part (c), the following responses were prepared on the assumption that the Canadian resident is an employee of the U.S. company. The answer to part (b) includes general comments on permanent establishment determinations for the non-resident employer.
If the Canadian resident is self-employed, the business income arising from the activity would still be sourced and taxed in the country where the services are actually performed. The existence of a permanent establishment of the commuter in Canada would only be relevant to the extent that the commuter does not reside in Canada and carries on its own business rather than being an employee of the U.S. company.
To determine whether a person is an employee or a self-employed individual, the key question to ask is whether the person is engaged to carry out services as a person in business on their own account or as an employee. The element of control by the employer and the facts of the working relationship as a whole decide the employment status. If the commuter is self-employed, expenses incurred to generate the income would generally be deductible, subject to the general limitations provided by the Income Tax Act.
With respect to part (d), the small business deduction applies only to Canadian-controlled private corporations that carry on business primarily in Canada.
With respect to part (e), please see the response to parts (b) and (c) for the discussion on whether the commuter’s home is considered a permanent establishment of the U.S. corporation or not.
Assuming that the Canadian resident is only working as an employee of the U.S. company, limited home office expenses are deductible by the employee if the employee is required by the employer to incur such expenses. If there is an office available for the employee in the U.S. but the employee chooses to avoid commuting time, the employer may not be able to certify that the home office is a work requirement. If the Canadian resident provides services to the U.S. company as a self-employed individual and the Canadian resident’s principal office is at his or her home, the expenses likely would be deductible, subject to the general limitations provided by the Income Tax Act.
With respect to part (f), whether the commuter’s home is considered a permanent establishment of the U.S. corporation is defined in the answers to parts (b) and (c). Assuming that it is an employment relationship, travel from the employee’s home to the office is generally considered personal in nature.
