Lost COVID-19 employees in Canada: Important employer considerations

HR teams often seem to be the last to know the whereabouts of their employees. In the current COVID-19 pandemic environment, it would appears that tracking down employees can lead to some unexpected surprises. “Working from home” may turn out to be “working from a completely different country”.

During this COVID-19 pandemic period, an individual employee may be tempted to relocate to Canada from their regular “home” jurisdiction. Since March 2020, we have become aware of a number of incidences where Canadian individuals living and working abroad return to Canada to live with family and work remotely. On the surface, the issues may seem trivial, however, digging a little deeper, the employee’s temporary relocation to Canada can create significant reporting issues for both the individual as well as the employer.

When an individual is working in Canada on behalf of a foreign employer, a number of issues arise that need to be managed by both the individual as well as the employer. In particular:

The employee should consider their personal income tax liability arising out of physically working in Canada. The employee needs to be aware that regardless if their payroll is delivered outside of Canada (i.e. to a foreign bank account), employment physically rendered in Canada may trigger a significant Canadian income tax liability.
If the employee continues to have income tax remitted in the country where the payroll is delivered, however, the primary tax liability is arising in Canada, a significant cashflow shortfall may arise. As well, spending significant amount of time in Canada during this pandemic may trigger Canadian income tax residency subjecting the individual to taxation on his/her worldwide income for the entire 2020 calendar year.
A foreign-based employer has an obligation to withhold and remit Canadian income tax and social security premiums on the wages earned by the employee in Canada. The employer will also have an obligation to report annual compensation details to the Canada Revenue Agency. Significant penalties for failure to remit the required source deductions can be levied.
The employee’s activity in Canada may create significant corporate income tax reporting obligations for a foreign-based organization. Penalties can apply for failure to file certain treaty-based corporate income tax reporting and the organization may be subject to corporate income tax.

The Canada Revenue Agency issued administrative guidance in May 2020 (and later modified in August 2020) covering the period from March 16 to September 30, 2020 in regards to certain international aspects arising out of the COVID-19 crisis. Such guidance primarily covers circumstances arising due to travel restrictions imposed on the individual employee.

The focus of the CRA administrative relief for individuals and organisations applies in circumstances where an individual was visiting Canada when the travel restrictions were imposed and was unable to return to their country of residence. Where such a situation applied, the CRA offered some administrative relief including:

Relief from possible personal income taxation arising from employment in Canada
Relief from possible individual Canadian tax residency
Relief from possible corporate permanent establishment

While the intention of the administration relief is welcome, the actual potential application appears to be limited. In particular, the CRA commentary has been drafted in regards to circumstances involving an individual who has been essentially “trapped” in Canada and unable to return to their main country location due to COVID-19 travel restrictions.

In many situations, the choice of the individual to enter Canada has been a voluntary one and there have been very limited restrictions in actually traveling back to their home country. On the surface and absent any additional commentary from the CRA, it would appear that the administrative relief provisions would not appear to provide relief in many situations as the employee likely could have returned to their “home” country at any time.

International employee travel is not something new for many organisations. However, some domestic organisations with no known international activities may unexpectedly be subject to Canadian reporting obligations when an employee relocates to Canada for a significant period during this pandemic. Human Resource, Payroll, Finance and Tax teams need to come together to understand their collective exposure arising from employee travel to Canada.

BDO comment

Organisations need to reconfirm any assumptions made in regards to the location of its employees working from home during this pandemic period. Where individual employees are confirmed to be working remotely from Canada, the organization needs to understand its corporate payroll and income tax exposure and take necessary steps to properly be compliant with its obligations to minimise any penalty risk. With the calendar year ending in the near future, time is of the essence.

Daren Raoux
draoux@bdo.ca

Heather Cook
hcook@bdo.ca