International income tax issues: CRA and COVID-19

1. Individuals

   In general, an individual's residence for Canadian tax purposes is a common-law factual determination based on the individual's residential ties to Canada. In addition, an individual who temporarily stays (is physically present) in Canada for a period of, or periods that total 183 days or more in a tax year will be deemed to be resident in Canada throughout the year.

   Potential Issue

   Individuals visiting Canada when the travel restrictions were imposed may not have been able to return to their country of tax residence as they intended and instead had to stay in Canada. Could this extended stay in Canada result in the individual being resident in Canada for Canadian tax purposes?

   Agency position

   If an individual stayed in Canada only because of the travel restrictions, that factor alone will not cause the CRA to consider the common-law factual test of residency to be met. Also, as an administrative matter and in light of the extraordinary circumstances, the CRA will not consider the days during which an individual is present in Canada and is unable to return to their country of residence solely as a result of the travel restrictions to count towards the 183-day limit for deemed residency. This will be the CRA position where, among other things, the individual is usually a resident of another country and intends to return, and does in fact return, to their country of residence as soon as they are able to.

   In this regard, in determining a taxpayer’s eligibility for relief under this (or another) section of this guidance, we will generally view the Canadian government’s recommendation to Canadians to return to Canada as a travel restriction. This would include a scenario where an individual would have been permitted under the laws of their country of residence to remain in (or return to) that country.

2. Corporations

   Under the Canadian income tax system, corporations that have been established under foreign law are nevertheless considered resident in Canada if their central management and control is located in Canada. One of the key factors typically considered in applying this common-law concept is the jurisdiction in which the meetings of the board of directors take place.

   Potential Issue

   A corporation that, before the implementation of the travel restrictions, was tax resident in a foreign jurisdiction may have one or more directors present in Canada. The travel restrictions might have resulted in these directors being unable to travel to the foreign jurisdiction to attend board meetings. If directors of such a corporation participate in board meetings while physically present in Canada, will the CRA consider the corporation's central management and control to be in Canada, such that it is resident in Canada for Canadian tax purposes and therefore a dual resident (that is, a resident of Canada and a resident of the foreign jurisdiction)?

   Agency Position

   Some of Canada's income tax treaties will address the situation of the dual residency of a corporation by determining the corporation to be resident in the country under whose laws it was created. For example, if the corporation is an entity created under the laws of the United States as a C-corporation or S-corporation, the CRA expects that the corporate residency tiebreaker rule contained in Article IV of the Canada-United States income tax treaty will address this issue.

   Other tax treaties contain a residency tiebreaker rule that looks to the corporation's place of effective management, among other factors. For corporations covered by such income tax treaties, in light of the extraordinary circumstances resulting from the travel restrictions, as an administrative matter, where a director of a corporation must participate in a board meeting from Canada because of the travel restrictions, the CRA will not consider the corporation to become resident in Canada solely for that reason.

   Determinations of corporate residency involving potential dual residency with non-treaty countries will be determined on a case by case basis.

   This administrative approach will also be followed in respect of other entities established in foreign jurisdictions that are considered corporations under Canadian income tax law, such as limited liability companies. In addition, where appropriate, the CRA will consider adopting a similar approach in determining the residency of a commercial trust. Finally, the CRA will also adopt a similar approach in determining the residence of a foreign affiliate of a Canadian corporation for surplus calculation purposes. In other words, where a director of a foreign affiliate that, before the travel restrictions, was resident in a country with which Canada has an income tax treaty, is unable to participate in board meetings because of the travel restrictions, the CRA will not consider the corporation to cease being resident in that country for surplus calculation purposes solely for that reason. Determinations of corporate residency involving foreign affiliates resident before the travel restrictions in non-treaty countries will be determined on a case by case basis.

   It is important to note that, notwithstanding that our comments above concentrate on the location of board meetings, there is more to where central management and control of a corporation, or where place of effective management (for income tax treaty purposes) is located than the location of board meetings. The determination of the central management and control of a corporation is based on a number of factors, of which the location of board meetings is only one element. Similarly, the location of board meetings is also only one element in determining the location of a corporation's place of effective management. The CRA may still conclude that a corporation is resident in Canada where the actual management and control of the corporation takes place in Canada, even though the board meetings have taken place elsewhere.

Under the Canadian income tax system, non-residents of Canada are liable to pay tax on their income from "carrying on business in Canada." In general, where Canada has entered into an income tax treaty with another country, a resident of that country will only have to pay tax in Canada on that income if their activities in Canada meet the threshold of a "permanent establishment" under the relevant income tax treaty.

Potential Issue

A non-resident entity may employ individuals to work outside of Canada. Due to the travel restrictions, the only way for some of these individuals to fulfil their employment duties might be by performing them in Canada. Will employees who regularly work outside of Canada but, due to the travel restrictions, exercise their employment duties in Canada result in the non-resident entity carrying on business in Canada or create a permanent establishment in Canada for the non-resident entity?

Agency Position

Non-resident entities that are resident in a jurisdiction with which Canada has an income tax treaty and that are carrying on business in Canada, but whose activities in Canada do not meet the threshold of permanent establishment, have to file a return for that year in order to claim an exemption from Canadian income tax. This filing obligation continues to apply for the tax years of non-resident entities that overlap with the period while the travel restrictions are in place. However, as an administrative matter and in light of the extraordinary circumstances resulting from the travel restrictions, the CRA will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their employment duties in Canada solely as a result of the travel restrictions being in force. Similarly, the CRA will not consider an "agency" permanent establishment to have been created for the non-resident entity solely due to a dependent agent concluding contracts in Canada on behalf of the non-resident entity, while the travel restrictions are in force, provided that such activities are limited to that period and would not have been performed in Canada but for the travel restrictions.

If Canada has not entered into an income tax treaty with the country in which the non-resident entity is resident, and if the non-resident entity carries on business in Canada, it is required to file a return for that year. If it can be demonstrated to the CRA that the non-resident entity has satisfied the Canadian income tax threshold of carrying on business in Canada only because of the travel restrictions, the CRA will consider whether administrative relief is appropriate on a case by case basis.

Finally, the CRA will exclude, in determining whether an individual meets the 183-day presence test in a "services-permanent–establishment" provision of Canada's tax treaties [such as article V(9)(a) of the Canada-United States income tax treaty], any days of physical presence in Canada due solely to the travel restrictions.

Many individuals residing on either side of the Canada-U.S. border may be employed and perform their employment duties in the other country.

1. US Resident Employees

   Under the Canada-United States income tax treaty, Canada can tax salary, wages and other similar remuneration derived by a resident of the United States for employment services provided in Canada, if the employment is exercised in Canada. Notwithstanding the above rule, such remuneration is not taxable in Canada if either of the following apply:

   • The remuneration is not greater than CAN$10,000
   • The person is present in Canada for no more than 183 days in any 12-month period, starting or ending in the fiscal year concerned and the remuneration is not borne by either:
     • an employer who is a resident of Canada
     • a permanent establishment which the employer has in Canada

   A reciprocal rule applies for residents of Canada working in the United States.

   Potential Issue

   Some U.S. residents who regularly exercise their employment in Canada and who are normally not present in Canada in excess of 183 days (and, for that reason alone, are not taxable in Canada on their employment income) may now be exercising their duties in Canada for an extended period of time, as a result of the travel restrictions. In these situations, will the employees' taxation in Canada be changed?

   Agency Position

   If such individuals are present in Canada, and are exercising their employment duties in Canada solely as a result of the travel restrictions, those days will not be counted toward the 183-day test in the Canada-United States income tax treaty. As such, these individuals will continue to benefit from the treaty relief provided under the Canada-United States income tax treaty.

2. Other resident employees

   The CRA will also take this approach in applying the days-of-presence test in Canada's other tax treaties.

3. Canadian Resident Employees

   Under Canadian rules, a non-resident employer is required to deduct withholdings at source from the salary that it pays to an employee who is a resident of Canada, regardless where the services are rendered. Where appropriate, the Agency will issue a "letter of authority" to the employee authorizing the non-resident employer to reduce the Canadian deductions at source to take into account the foreign tax credit available to the employee in respect of their foreign tax liability.

   Potential Issue

   A non-resident entity may employ Canadian residents to work outside of Canada. As a result of the travel restrictions, the only way for some of these Canadian resident employees to fulfil their duties might be by performing them in Canada on an exceptional and temporary basis. Will the performance of employment duties from Canada affect the withholding obligations of the non-resident entity?

   Agency Position

   If a Canadian resident employee of a non-resident entity is forced to perform their employment duties in Canada on an exceptional and temporary basis as a result of the travel restrictions, and that employee has been issued a letter of authority applicable to the tax year including that period, the letter of authority will continue to apply and the withholding obligations of the non-resident entity will not change in Canada, as long as there are no changes to the withholding obligations of the non-resident entity in the other jurisdiction.

4. Non-resident employer withholdings with non-resident employee in Canada

   The situation may arise where, due to the COVID-19 crisis, a non-resident employee of a non-resident employer travelled to Canada for personal reasons and, as a result of the travel restrictions, was unable to return to their country of residence when intended. Although it may not have been their intention, if the non-resident employee performs their duties of employment remotely while in Canada, and continues to receive remuneration for those duties, the non-resident employer would be subject to Canadian withholding, remitting, and reporting obligations, notwithstanding that the non-resident employee may ultimately be exempt from tax in Canada due to a tax treaty.

   For the non-resident employer to be relieved of their obligation to withhold and remit the applicable taxes, the non-resident employee would have to apply for and receive a waiver of the tax required to be deducted. Alternatively, the non-resident employer could apply for certification as a qualifying non-resident employer, and if the non-resident employee also qualifies, the non-resident employer would not have to withhold and remit tax on the payments they make to the non-resident employee. Both these remedies apply only where the non-resident employee is working in Canada for a limited time and is exempt from tax in Canada under a tax treaty. However, these remedies are only available in respect of a payment if granted prior to the date that the payment was made.

   In light of the extraordinary circumstances caused by the COVID-19 crisis, it is plausible that a non-resident employee who customarily performed their duties of employment for the non-resident employer in their jurisdiction of residence travelled to Canada unexpectedly, in haste, or under personal distress, and commenced performing their duties of employment remotely while remaining in Canada due to the travel restrictions. The non-resident employer and the non-resident employee may not have had the time or knowledge necessary to obtain the available relief from Canadian withholdings, at that time.

   Potential Issue

   The non-resident employee would be subject to both Canadian payroll withholdings, and those of their jurisdiction of residence, and the resulting reduction in net pay could cause undue hardship.

   Additionally, the non-resident employer, failing to withhold and remit the required Canadian amounts without authorization from the Agency, could be held liable for the whole amount with interest and penalties.

   Agency Position

   Note: The ending date referenced above for the application period of the guidance on this page, September 30, 2020, is not applicable to subsection III. D. Non-resident employer withholdings with non-resident employee in Canada. The ending date for this subsection is detailed below.

   As an administrative matter and in light of these extraordinary circumstances, the Agency will not assess or penalize a non-resident employer for failing to withhold the required Canadian payroll deductions, in respect of remuneration paid to a non-resident employee performing duties of employment remotely in Canada, where the non-resident employer and the non-resident employee, as may be required, can reasonably demonstrate that:

   • the non-resident employee is resident in a country with which Canada has a comprehensive tax treaty (treaty);
   • the non-resident employee is not resident in Canada for tax purposes in accordance with the relevant treaty;
   • the remuneration received by the non-resident employee for performing their duties of employment in Canada would otherwise be exempt from taxation in Canada in accordance with the relevant treaty;
   • the non-resident employee regularly and customarily performs their duties of employment outside of Canada and has not previously performed duties of employment in Canada, as a non-resident of Canada, for any employer;
   • there is no employer-employee relationship between the non-resident employee and any employer in Canada;
   • there has been no significant change to: the non-resident employee’s duties of employment (other than working remotely) while working in Canada; or the employer-employee relationship that existed between the non-resident employer and the non-resident employee at the time the non-resident employee travelled to Canada; and
   • the non-resident employee travelled to Canada due to the COVID-19 crisis or for reasons not relating in any manner whatever to their employment, and could not return to their jurisdiction of residence solely due to COVID-19 travel restrictions.

The Agency will respect this position for the period beginning on the day the non-resident employee commenced exercising their duties of employment in Canada because they were unable to return to their jurisdiction of residence due to the COVID-19 travel restrictions, and ending on the date that is the earliest of:

• the day the non-resident employee returned or was able to return to their jurisdiction of residence;
• the day specified on a Regulation 102 waiver relieving the non-resident employee from the relevant Canadian withholdings;
• the day the non-resident employer was certified by the Minister as a qualifying non-resident employer and the non-resident employee was also a qualifying non-resident employee, or
• December 31, 2020.

Canadian income tax rules require that amounts must be deducted or withheld and remitted for:

• payments to non-residents for services rendered in Canada, other than those paid for an office or employment (regulation 105)
• remuneration paid to a non-resident officer or employee for an office, or employment services, provided in Canada (regulation 102)

In certain circumstances, an application to the CRA may be made for a waiver of the withholding requirement under regulation 105 or 102. Most often, this will be the case if a recipient is exempt from Canadian income tax for a payment because of an income tax treaty that Canada has with the recipient's country of residence.

Potential Issue

During the COVID-19 pandemic, processing times for international waivers may be longer than usual.

Agency Position

We are continuing to process international waivers. You can submit all waiver and non-resident employer certification applications by mail, fax or online using My Account for Individuals, Represent a Client, and My Business Account. The process for sending documents by email was terminated effective March 31, 2021.

For information on how to avoid processing delays, see How to obtain international waivers and certificates of compliance during the COVID-19 crisis.

In a situation where a waiver request for regulation 105 and/or 102 was sent to the CRA between March 1, 2020 and June 30, 2020 (the service interruption), and the CRA was unable to process the request within 30 days, the CRA will not assess a person who fails to deduct, withhold or remit any amount as required by regulations 102 and 105, for an amount paid to a non-resident person covered by the particular waiver request.

Relief will be applicable if the only reason a non-resident could not obtain a waiver of regulation 102 or 105 withholdings from the CRA was due to the delay caused by the service interruption, and the person paying the amount can demonstrate they took reasonable steps to ascertain that the non-resident was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty with Canada. Both the non-resident and the person paying the amount must otherwise have fulfilled their Canadian reporting and remitting obligations in respect of the waiver application.

Other situations may arise, during or after the period of service interruption provided above, where a waiver request could not be sent to the CRA due to the travel restrictions or other consequences of the COVID-19 crisis, and yet no amounts were withheld pursuant to regulations 102 and 105. The CRA will review these situations on a case-by-case basis to determine if the non-compliance can be solely and directly attributed to the effects of the COVID-19 crisis. In those cases, the CRA will not assess a person who fails to deduct, withhold or remit any amount as required by regulations 102 and 105, in respect of an amount paid to a non-resident person, and they can demonstrate they took reasonable steps to make sure that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty with Canada. Both the non-resident and the person paying the amount must otherwise have fulfilled their Canadian reporting and remitting obligations in respect of the waiver application.

Under Canadian income tax rules, a non-resident vendor who disposes of certain taxable Canadian property must notify the CRA about the disposition either before they dispose of the property or no later than 10 days after the disposition. Once the CRA has received either an amount to cover the tax on any gain the vendor may realize on the disposition of property, or appropriate security for the tax, the CRA will issue a certificate of compliance to the vendor (a section 116 certificate). A copy of the certificate is also sent to the purchaser.

If the purchaser does not receive a section 116 certificate within 30 days of the end of the month in which the property was acquired, they have to remit a specified amount to the Receiver General for Canada and is entitled to deduct that amount from the purchase price. Any payments or security provided by the vendor or purchaser will be credited to the vendor's account. A final settlement of tax will be made when the CRA assesses the vendor's income tax return for the year.

Potential Issue

During the COVID-19 pandemic, processing times of requests for section 116 certificates may be longer than usual.

Agency Position

If a vendor has submitted a request for a section 116 certificate, but the certificate has not been issued by the time a purchaser's remittance is due (that is, within 30 days of the end of the month in which the property was acquired), the buyer or vendor may ask the CRA for a comfort letter.

The comfort letter advises the purchaser/vendor/representative to retain the funds they have withheld (even though technically, the amounts are due) until the CRA's review is complete and the CRA asks the purchaser to remit the required tax. As long as the tax is remitted when requested, the CRA will not assess a penalty or interest on the amount.

A comfort letter can be requested directly from the CRA officer you are dealing with if one has been assigned, or may also be requested by contacting the CRA's individual tax enquiries line at 1-800-959-8281. Comfort letters can also be requested by fax at 1-833-329-1161 (Canada and U.S.) or 418-566-0324 (outside Canada and U.S.), or online through My Account, Represent a Client or My Business Account. Make sure to provide your name and case number (if available) on all requests.

The process for sending documents by email was terminated effective March 31, 2021.

Non-resident employees providing employment services in Canada are subject to the same withholding, remitting, and reporting obligations as Canadian resident employees. Therefore, any employer, including a non-resident employer, has to withhold amounts on account of the income tax liability of an employee in Canada, even if the employee is likely to be exempt from tax in Canada because of a tax treaty. For the employer to be relieved of their obligation to withhold, the employee would have to apply for, and get, an income tax waiver from the CRA [as discussed in IV. Waiver requests – Payments to non-residents for services provided in Canada above].

However, there is an exception to the employer's withholding obligation for certain non-resident employers paying employment income to non-resident employees for performing the duties of an office or employment in Canada. These non-resident employers, who apply for and receive certification as a qualifying non-resident employer, will not have to withhold and remit tax on the payments they make to a qualifying non-resident employee who is working in Canada for a limited time and is exempt from tax in Canada under a tax treaty.

For more information, go to non-resident employer certification.

Potential Issue

An individual working in Canada as a qualifying non-resident employee when travel restrictions were imposed may not have been able to leave Canada as they had intended and instead had to stay in Canada. Could this extended stay in Canada result in the individual losing their status as a qualifying non-resident employee and obligate the qualifying non-resident employer to withhold and remit Canadian payroll deductions to the CRA on the employment income paid?

Agency Position

In light of the extraordinary circumstances, the CRA will not consider the days, during which a non-resident individual is working or present in Canada and cannot return to their country of residence due to the travel restrictions, to count towards the 45 days worked or the 90 days present in Canada for the definition of a qualifying non-resident employee. This will be the CRA position where it can reasonably be shown that the employer expected the employee to leave Canada before losing their status as a qualifying non-resident employee, and the employee returns to their country of residence as soon as they can.

To keep certification as a qualifying non-resident employer, the employer will track and document, among other things:

• the days during which the qualifying non-resident employee is working or present in Canada and cannot return to their country of residence, due to travel restrictions
• the employment income that corresponds to these days of work in Canada

The administrative relief provided under the guidance above generally applied in the initial relief period.

Despite this relief, the CRA is aware that certain individuals continue to have concerns about potential income tax issues because of the travel restrictions lasting past the initial relief period. Additionally, some individuals that were affected by the travel restrictions may be uncertain about how to satisfy their Canadian income tax obligations for 2020 and 2021.

This supplement provides additional guidance for individuals in these situations, by:

• extending the administrative relief in respect of individual income tax residence;
• clarifying some of the CRA’s views regarding the effect of the travel restrictions on the determination of a permanent establishment in Canada; and
• providing an outline of the Canadian income tax and compliance requirements of certain cross-border employees and providing some relief in respect of these requirements.

As with the guidance initially provided, this supplemental guidance is intended to assist taxpayers during this time of crisis and does not represent any interpretive position or intention to establish any broader policy by the CRA. Accordingly, the supplemental guidance below is applicable only for the periods described in the specific section.

1. Individual income tax residency

   For the initial relief period, the guidance provides that the CRA will not consider the common-law factual test of residency to be met if an individual stayed in Canada only because of the travel restrictions. In such situations, an individual’s days physically present in Canada will not count towards the 183-day limit for deemed residency.

   This supplemental guidance extends the period to which this specific relief applies until the earlier of the date of the lifting of the travel restrictions and December 31, 2021. This extension of administrative relief applies solely in respect of individuals and does not extend to the determination of corporate residency.

   With respect to the common-law test of residency, this relief continues to apply only in respect of the individual’s physical presence in Canada. A determination that the individual is factually resident in Canada is still possible where other indicators of residence are present, such as having a permanent home in Canada or enrolling in government programs intended for Canadian residents.

2. Permanent establishment

   For the initial relief period, the guidance above provides that, administratively, the CRA will not consider a non-resident entity to have a permanent establishment in Canada solely because an employee performed their employment duties in Canada as a result of the travel restrictions being in force. The relief extends to the determination of an "agency" permanent establishment.

   Some individuals, because of the travel restrictions, may have continued to exercise their employment duties in Canada after the initial relief period. For example, a Canadian resident who normally exercised their employment duties at the office of their United States employer may have begun working from their home in Canada during the pandemic and may continue to do so until the travel restrictions are lifted. Another example would be a Canadian citizen factually residing in the United States and working for a United States employer who followed the Canadian government’s recommendation to Canadians to return to Canada and now continues to work remotely for their United States employer from Canada.

   The administrative relief provided for the initial relief period is no longer applicable to determinations as to whether or not the non-resident employer has a fixed place of business in Canada. However, the CRA expects that the application of the relevant treaty provisions to their situation will generally not result in the finding of a permanent establishment for the employer. A location (for example, home office or other workspace) will constitute a permanent establishment if it is a fixed place of business through which a business is partly or wholly carried on. In order for there to be a fixed place of business in Canada, there must be a semblance of permanence to the site. As well, the site must be at the “disposal” of the employer. The fact, on its own, that an individual described in one of the examples above works remotely from their home or short term residence in Canada while the travel restrictions remain in place will generally not be sufficient to meet the thresholds of a permanent establishment.

   This conclusion could change should the employee continue to exercise their employment duties in Canada after the lifting of the travel restrictions or if the individual and their employer take action to establish the workspace in Canada as an office of the employer which has a semblance of permanence and is at the disposal of the employer.

   Similarly, in order to meet the requirements of an “agency” permanent establishment, an individual must not only have the right to conclude contracts on behalf of an enterprise, they must also habitually exercise that right. This habitual requirement would not be met where an individual described in one of the examples above has the right to conclude contracts on behalf of their employer and is doing so from Canada solely because of the travel restrictions.

   As with the fixed place of business determination, this conclusion could change for both the period of time during which the travel restrictions are in place as well as afterwards if the employee remained in Canada past the lifting of the travel restrictions and continued to exercise the right to conclude contracts.

   These conclusions would also be generally applicable in respect of employees that, before the COVID-19 crisis, were employed in a country other than the United States.

   The Canada-United States income tax treaty also contains another type of permanent establishment, commonly referred to as a “services” permanent establishment. A services permanent establishment will be created where:

   • services are performed in Canada by an individual who is present in Canada for a period or periods aggregating 183 days or more in any twelve-month period and, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in Canada by that individual; or
   • services are provided in Canada for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of Canada or a permanent establishment in Canada.

   Each affected individual will need to examine their personal situation to determine whether they meet either of these tests. However, most employees described in the examples above would not meet either of these thresholds if they are not working on projects for Canadian customers.

3. Cross-border employment income

   (i) US Resident Employees

   The guidance above provides that, in the initial relief period, if United States-resident individuals are present in Canada and exercising their employment duties in Canada solely as a result of the travel restrictions, those days will not be counted toward the 183-day test for employment income in the Canada-United States income tax treaty.

   In the absence of this relief, an affected individual would have become subject to Canadian income tax on a portion of their employment income. The Canadian income tax paid would be credited to the individual in determining their United States income tax. However, it would have created a more complicated 2020 income tax compliance burden on these individuals.

   The administrative relief in the initial relief period in respect of the 183-day test in the employment article of the Canada-United States income tax treaty is being extended to December 31, 2020. An individual in this situation who has remained in Canada after December 31, 2020, must include each subsequent day present in Canada in calculating whether the 183-day test has been met.

   As set out in section III. D. of the guidance above, an employer of an individual who continues to work remotely from Canada as of January 1, 2021, must, in accordance with Canadian legislation, either withhold and remit in respect of the employee or have the withholding requirement waived by the CRA. The CRA suggests that an affected individual in this situation refer their employer to the CRA webpage regarding employer withholding and remittance obligations, or contact the CRA’s Liaison Officer service if further assistance is required.

   As an administrative matter, where the conditions in subsection III.D. were met, a non-resident employer will not be required to submit a T4 slip for the 2020 taxation year in respect of the particular non-resident employee. However, the CRA expects the non-resident employer to track and document, among other things:

   • the days during which the non-resident employee is working or present in Canada and cannot return to their country of residence, due to travel restrictions;
   • the employment income that corresponds to these days of work in Canada.

   (ii) Canadian Resident Employees

   2020 tax year

   As a result of the travel restrictions, some Canadian resident individuals may have been forced to perform their employment duties from their home in Canada instead of at the office of their United States employer. The CRA recognizes that there is uncertainty as to how affected individuals are to comply with their income tax obligations for 2020 and 2021. In order to reduce this uncertainty, this supplemental guidance provides information and relief in this regard.

   The guidance in section III.C above provides that, for the initial relief period, where a letter of authority had been issued by the CRA in respect of withholdings, the letter would continue to apply. As a result, the withholding obligations of the non-resident employer would not change in Canada, as long as there are no changes to the withholding obligations of the non-resident employer in the other jurisdiction. However, notwithstanding that their employer’s withholding obligations did not change, some individuals in this situation may now be subject to tax on a lower amount of income in the United States and, as a result, pay a greater amount of income tax in Canada. This is because of the rules in the Canada-United States income tax treaty.

   For individuals in this situation, whose taxes continued to be withheld as if the income was earned in the United States, the CRA will provide an administrative concession in order to simplify the reporting obligations for those who so prefer. In such situations, the CRA will consider the employment income from the United States employer to be sourced from the United States for 2020. This means they can file their tax returns like they did in prior years and claim a foreign tax credit for amounts paid in the United States. Individuals who choose to file in this manner must maintain their records in case the CRA needs to confirm the amounts paid to the United States. Income that was not subject to withholding in the United States must be reported as if it was sourced in Canada. In addition, should any amounts paid to the United States be refunded at a later time, the employee must file an amended return adjusting the amount of the foreign tax credit claimed in Canada. Note this administrative concession applies only to individuals who, because of the travel restrictions, have been forced to perform their employment duties from their home in Canada instead of at the office of their United States employer.

   Alternatively, these individuals may choose to file their 2020 Canadian income tax return in accordance with the income sourcing rules in the Canada-United States income tax treaty. In other words, they may choose to report their employment income as sourced from Canada since they performed their duties from Canada. Affected individuals whose 2020 income tax withholdings were changed to reflect the sourcing rules in the Canada-United States income tax treaty must file their Canadian income tax return using this method. The following outlines how an affected individual using this method should file their 2020 Canadian income tax return, and outlines how the CRA will treat specific amounts typically relevant to cross-border employees resident in Canada:

   • If the individual has paid income tax to the United States, in respect of income that was taxable in the United States under the Canada-United States income tax treaty, the individual may claim a foreign tax credit in respect of that income tax.
   • As in years for which the taxpayer was exercising their duties in the United States, if the individual has made valid contributions to the United States in 2020 under the United States Federal Insurance Contributions Act (FICA), the individual may claim a foreign tax credit in respect of those contributions. For the purpose of claiming the FICA contribution portion of the individual’s foreign tax credit, administratively the entire amount of the individual’s employment income on which the contributions were based may be included in the individual’s 2020 foreign non-business income.
   • If the individual has made contributions to a United States retirement plan in 2020, they may determine the amount deductible on form RC268 as if the individual had continued to exercise their employment duties in the United States throughout all of 2020.
   • If the individual has paid state income tax in 2020, and the payee state has refused to give up its right to tax the individual, the individual may claim a foreign tax credit in respect of those taxes paid despite the income being earned in Canada. This is an administrative measure and is applicable only to the 2020 tax year of affected individuals. For the purpose of claiming the credit, the foreign non-business income of the individual would consist only of the portion of the employment income the individual would have earned in the state had they continued to commute to work in the United States in 2020. Should the state tax be refunded at a later time, the employee must file an amended return adjusting the amount of the foreign tax credit claimed in Canada.

   Affected individuals who file their Canadian income tax return in accordance with the Canada-United States income tax treaty may have a higher Canadian tax liability. These individuals are expected to take whatever actions reasonably necessary to obtain any applicable refund of withholdings from the United States and to pay their Canadian income tax by the payment due date. However, some individuals may temporarily find it difficult to pay the full amount owing until after the payment due date when they receive a refund of their withholdings from the United States. In these circumstances, the CRA will cancel all or part of the interest or late-payment penalties that arise as a result until the time the individual receives their United States refund and pays it towards their amount owing within a reasonable time.

   There may also be a number of affected individuals who, after filing their 2020 return, receive a notification that they must remit income tax instalments in 2021, as a result of the larger than usual Canadian income tax payable for 2020. In these circumstances, the CRA will also cancel instalment penalties and interest if charged.

   Requests for relief of interest and penalties can be made online by selecting “Request relief of penalties and interest” in My Account at canada.ca/my-cra-account, or by filling out Form RC4288 Request for Taxpayer Relief - Cancel or Waive Penalties or Interest and submitting it along with all supporting documents online using the “Submit documents” service in My Account or by mail to one of the designated CRA offices listed at the end of the form. In making the request, the individual should provide a detailed description of their employment arrangement and provide a copy of their Form W-2, U.S. 1040 return, U.S. account transcript and any other document that confirms the receipt of the U.S. refund. For more information about the cancellation of penalties and interest and how to submit a request, go to Cancel or waive penalties or interest.

   2021 tax year

   The CRA is extending to the 2021 tax year the same administrative relief applicable for affected individuals’ 2020 tax year. In other words, for affected individuals whose employers have continued to impose withholdings in 2021 as if the income was earned in the United States, the CRA will again provide an administrative concession and will consider the employment income from the United States employer to be sourced from the United States for 2021.

   Additionally, for affected individuals who file their 2021 Canadian income tax return in accordance with the income sourcing rules in the Canada-United States income tax treaty, the same relief that was made available in respect of their 2020 tax year (e.g. treatment of FICA taxes and contributions to United States retirement plans) will be available for 2021. For affected individuals who file in accordance with the Canada-United States income tax treaty, the CRA will again consider granting relief of any interest and penalties imposed in respect of the payment of the individual’s 2021 income tax or in respect of instalment payments imposed on the individual.

My employer’s office is in the United States. In previous years, I reported to work at my employer’s office. Because of the travel restrictions imposed as the result of the COVID-19 crisis, I started working for my employer from my home in Canada in March and continued to do so for the rest of 2020. I understand that this may affect my 2020 Canadian income tax obligations and have some questions about this:

1. If I live in Canada but work for an employer in the United States, to which country do I pay my income tax, and how is that determined?
   Under Canadian income tax law, residents of Canada are taxed on their worldwide income, including any employment income from working in the United States. Under the Canada-United States Income Tax Treaty (the “Treaty”), the United States also has the right to tax a Canadian resident working for an employer in the United States on their employment income if their employment duties were performed in the United States and they earned more than US$10,000 from employment in the United States. This creates a situation where both Canada and the United States have the right to tax the employment income of a Canadian resident. To address this situation, Canada will still impose tax but it will allow the individual to claim a foreign tax credit in respect of tax paid in the United States.
   For previous years, because you reported to work at your employer’s office in the United States, your employment income was taxed in the United States and you were granted a foreign tax credit when you filed your Canadian income tax return.
2. Although I have been working from my home in Canada, my employer continued to make and remit my payroll deductions (withholdings) in the United States. Can I just file as I have done in previous years and pay income tax on my employment income to the United States?
   For the 2020 tax year of individuals in this situation, the CRA will provide an administrative concession in order to simplify the reporting obligations for those who so prefer. In such situations, the CRA will consider the employment income from the United States employer to be sourced from the United States for 2020. This means individuals can file their tax returns like they did in prior years and claim a foreign tax credit for amounts paid in the United States. Alternatively, these individuals may choose to file their 2020 Canadian income tax return in accordance with the income sourcing rules in the Treaty.
3. My employer issued a revised W-2 to me and refunded the portion of my United States income tax withholdings taken on my income that would not be taxable in the United States under the Treaty. Can I also choose to file my 2020 Canadian income tax return as in I did in previous years?
   Affected individuals whose 2020 income tax withholdings were changed to reflect the sourcing rules in the Treaty must file their Canadian income tax return using these sourcing rules. This means they can claim a foreign tax credit for the withholdings as per the revised W-2, but they must report the remainder of their employment income as taxable (sourced) solely in Canada.
4. I am filing my 2020 Canadian income tax return in accordance with the Treaty, but I participate in a United States retirement plan through my employer. In previous years I deducted my contributions to the plan on form RC268. Will I still be able to deduct these contributions? I also made contributions under the United States Federal Insurance Contributions Act (FICA) and paid state income tax to the state where my employer is located. Will I still be allowed to claim a foreign tax credit in Canada for these amounts?
   If you have made contributions to a United States retirement plan in 2020, that would have been deductible on form RC268 if made in a previous year, you may deduct your 2020 contributions in the same manner as in previous years.
   If you have made valid FICA contributions to the United States in 2020, you may claim a foreign tax credit in Canada in respect of those contributions.
   If you have paid state income tax in 2020, and the payee state has refused to give up its right to tax, you may claim a foreign tax credit in respect of those taxes paid despite the income being earned in Canada. This is an administrative measure and is applicable only to the 2020 tax year. However, should the state tax be refunded at a later time, you must file an amended return adjusting the amount of the foreign tax credit claimed in Canada.
5. I am going to file my 2020 Canadian income tax in accordance with the Treaty. But I am unsure how to apply sourcing rules to determine the time I spent working in the United States and the time I spent working in Canada. Are there any resources that I can use to help me?
   Income Tax Folio S5-F2-C1 — Foreign Tax Credit provides a comprehensive description of how to claim a foreign tax credit in Canada and includes guidance regarding how individuals should allocate their employment income.
6. My 2020 income tax withholdings were all remitted to the United States. I am going to file my 2020 Canadian income tax return in accordance with the Treaty, but I am concerned that I will not receive a refund of these withholdings in time to pay my Canadian tax liability. What should I do?
   The CRA realizes that some individuals may temporarily find it difficult to pay the full amount owing until after the payment due date when they receive a refund of their withholdings from the United States. In these circumstances, the CRA will cancel all or part of the interest or late-payment penalties that arise as a result until the time the individual receives their United States refund and pays it towards their amount owing within a reasonable time. Similarly, there may also be a number of affected individuals who, after filing their 2020 return, receive a notification that they must remit income tax instalments in 2021, as a result of the larger than usual Canadian income tax payable for 2020. In these circumstances, the CRA will also cancel instalment penalties and interest if charged.
   Instructions on how to apply for this relief are contained in subsection VII. C. of the guidance.
7. My employer told me that they are concerned my working from my home may cause it to be taxable in Canada (through the creation of a permanent establishment in Canada). Should they be concerned?
   While the administrative relief in respect of permanent establishment did end on September 30, 2020, the CRA, in general, does not expect that a permanent establishment would be created in Canada because of an individual working from home solely because of the COVID-19 travel restrictions. For more detail, please refer to subsection VII. B. of the guidance.

1. With respect to the section entitled “Persons entering Canada during the COVID-19 pandemic”, can quarantine days be counted as workdays if I worked during those days? Or could those days be exempt from taxation? How does this relief apply in calculating Canadian source income in relation to services performed in Canada by non-resident individuals?

   The relief in the guidance you have referenced is applicable only to the time in the quarantine period that an individual is in Canada but cannot work. It would not apply in respect of a person working during this period.

2. I am a Canadian citizen who returned to Canada due to COVID-19. In section VI. Non-resident employer certification, the Agency Position requires that “the employee returns to their country of residence as soon as they can”, how is this defined?

   The expectation for returning “as soon as they can” would generally be the same as that described for residency relief under section I.A. of the guidance.

3. How should I determine the “date of the lifting of the travel restrictions” in section VII.A? For example, if I returned to Canada during 2020 because of COVID-19 and remained in Canada for the year, would the CRA consider all days during this period to be as a result of a travel restriction, despite the fact that travel between Canada and the United States (US) remained possible for most of 2020?

   Yes, in the example provided, we would consider all of the days in 2020 that you were present in Canada to be because of the travel restrictions, as long as the crisis and government travel recommendation were the sole reasons for returning to Canada.

   The date of the lifting of the travel restrictions will be a question of fact. The CRA does not expect issues to arise from this approach, so long as any individual relying on the relief acts in good faith.

4. In section VII.C there is no reference to employees who are resident of countries other than the US or Canada. Does the initial guidance provided to residents of other countries continue to apply until September 30, 2020?

   The CRA will consider providing relief to an individual in this situation on a case-by-case basis.

5. I am a non-Canadian who chose to come to Canada during the pandemic period and worked in Canada (e.g. from a vacation property or while staying with family). Can my personal choice to avoid non-essential travel during the pandemic, or can my employer’s instruction to avoid non-essential travel, be considered a “travel restriction” for purposes of the relief granted for the period of March 16 to September 30, 2020?

   Relief for such situations is on a case-by-case basis, we would consider relief in such a situation but we would need to know the specifics.

6. In section VII.C(i), for the purposes of determining whether I met the 183-day test for 2020, I would exclude any 2020 days in Canada resulting from a travel restriction and would only consider the days in 2021. Does this also apply in determining whether the 183-day test was met in 2021, in other words, can 2020 days be excluded?

   Yes. If you are eligible for the relief, no days in 2020 will be counted towards the 183-day test in respect of their 2020 or 2021 tax year.

7. Is the extended relief in section VII.C(ii) applicable to me if I am a Canadian resident employee who had to perform my employment duties from my home in Canada instead of at the office in a location other than the US? In the initial guidance, section III.C pertained to all Canadian resident employees, and not only to those working for a US employer.

   The supplemental relief specifically addressed the situation of Canadian residents working for US employers because that was the largest group of individuals in this situation. The CRA will consider relief for those whose employers are in a country other than the US on a case-by-case basis.

8. Section VII.C(ii) provides relief from penalties and interest if an individual is waiting for a US refund to pay their Canadian balance due.

   1. Am I required to pay the penalty and interest prior to submitting a request for cancellation of penalties and interest? Also, if I am waiting for either the US refund to pay the Canadian balance and/or the CRA to process the request to cancel penalties and interest, will the CRA automatically put a hold on any collections notices to me? If not, will there be a streamlined process for me to request a hold on any such collections notices?

      The supplemental guidance does not require you to pay any assessed penalty or interest prior to submitting a request for relief. As the specific circumstances of individuals vary, there will be no automatic hold placed on collections notices. However, affected individuals who receive such a notice may contact the CRA’s debt management call centre at 1-888-863-8657 to speak to an agent and inform them of their circumstances. Affected individuals should be prepared to provide any verification information requested.

   2. Is it reasonable to assume that the cancellation of payment and interest will apply only to the amount of the US refund (and not the entire Canadian tax balance due)?

      You may make a request for relief in excess of their US refund. However, whether relief is granted in respect of that portion of the interest and penalties would be determined on its own merits and separately from the US refund portion of the request.

9. I am a Canadian resident who works for a US employer, I would ordinarily work in the US, and I performed services in Canada for 2020 due to travel restrictions, therefore, the remuneration paid for my services performed in Canada may not be subject to the Federal Insurance Contribution Act (FICA). What would the CRA view as a “valid contribution” to FICA? What if I obtained a Certificate of Coverage to continue to contribute to FICA?

   Generally, the intention is to allow an affected individual to claim a foreign tax credit in respect of amounts paid that are recognized as FICA contributions under that Act. Of particular concern would be an individual receiving a refund of their FICA contributions and attempting to claim a foreign tax credit in respect of those amounts. A Certificate of Coverage would generally be sufficient to show that an individual’s contributions were validly made.