International remote work: Tax issues, Part I (workers)
In part one of a two-part series, George Gonzalez and Gillian Holthe of the University of Lethbridge review key tax issues for remote workers outside Canada
REMOTE WORK has become a common working arrangement in Canada and other countries. Some remote work arrangements are completely domestic in nature, i.e., both the worker and the company they serve are in the same country. Other work arrangements are international, in which the worker and the company are based in different countries[1].
This two-part series of articles reviews key tax issues arising from international remote work arrangements in which the worker lives outside of Canada and serves a Canadian company. In this first part we examine tax issues for the international worker who provides the services. In the second part we review issues for the Canadian company that hires the international remote worker.
Employee or Independent Contractor?
The first issue to be considered is the remote worker’s working status under Canadian income tax law: is the worker an employee or an independent contractor?
The determination of whether a worker’s relationship with a company is that of an employee or an independent contractor is generally based on a well-established set of four tests. These tests, relied on by both the courts and the Canada Revenue Agency, are: the control test; the ownership of tools test; the integration test; and the chance of profit or loss test[2][3].
To provide value-added advice for the client who has entered, or is planning to enter, a remote working arrangement, a tax adviser should consider these tests and advise the client accordingly.
Income Tax Ramifications – Employee Status
A remote work employee based outside of Canada who works for a Canadian company would likely be entitled to employee benefits such as company pension benefits, medical insurance coverage, disability insurance coverage, etc. The worker would have income tax withheld from compensation by the employer. There would also be additional withholdings, such as one-half of Canada Pension Plan (CPP) contributions (the employer would pay the other half), and Employment Insurance (EI).
An important issue for the employee who is working from a location outside of Canada is the matter of tax residency[4],[5]. The income taxation of the worker’s income differs depending on whether the employee is a Canadian tax resident versus a non-resident.
Employee is a tax resident of Canada
They would report all of their taxable income, including employment income from the services that they provide the employer, in their resident T1 income tax return, in the same way as they would if they were living in Canada.
Employee is a non-resident of Canada
If the individual is considered a non-resident of Canada for tax purposes, they would be subject to income taxation on their Canadian-source income only (and not foreign-source income)[6]. The income from the employment services would very likely be considered Canadian-source income[7], and would be reportable as employment income in a non-resident T1 income tax return.
Depending on the country of residence, the remote worker may have to pay income tax on their Canadian-source employment income. If so, they may be able to claim a foreign tax credit on their Canadian T1 income tax return, and/or rely on a tax treaty if applicable, to minimise double taxation. In a tax treaty situation, i.e., if Canada has a tax treaty with the individual’s country of residence, it may be possible to have Canadian withholding taxes reduced.[8]
Income Tax Ramifications – Independent Contractor Status
A remote worker living outside of Canada who provides services to a Canadian company as an independent contractor must establish their tax residency status[9], as discussed in the last section, to determine what tax rules apply to them.
Independent contractor is a tax resident of Canada
As in the case of an employee, as discussed in the last section, if the individual meets the definition of Canadian tax resident in spite of the fact that they are living outside of Canada, then they would be subject to the same income tax obligations as they would be if they continued to live in Canada. They would report self-employment income from the services that they provide to their client, and all other taxable income, in their resident T1 income tax return in the same way as they would if they were living in Canada.
Independent contractor is a non-resident of Canada
If the individual is considered a non-resident of Canada for tax purposes, they would be subject to income taxation on their Canadian-source income only (and not foreign-source income)[10]. The income from the independent contractor services would very likely be considered Canadian-source income[11], and would be reportable as self-employment income in a non-resident T1 income tax return.
In situations where both countries may assert that a remote worker is a resident, tax treaties include “tiebreaker” provisions to resolve the issue. These provisions examine factors such as the location of the individual’s permanent home, the centre of their personal and economic ties, their country of habitual residence, etc. Applying these criteria helps determine a single country of residence for tax purposes, with an additional layer of complexity introduced during COVID-19 when temporary changes in work location became common.[12]
Noteworthy is that an independent contractor is entitled to claim business deductions as a self-employed individual[13].
The self-employed worker would be responsible for making Canada Pension Plan contributions. It is worth noting, in this regard, that a self-employed individual’s CPP contribution is based on net, not gross, self-employment income. It also bears mentioning that self-employed individuals are not required to contribute to Employment Insurance, though they may choose to do so by enrolling in the EI program for self-employed individuals.
Importantly, if the worker is a tax resident of a treaty country, one must consider the treaty’s provisions as they relate to self-employment income, often referred to in tax treaties as “Independent Personal Services”. In many of Canada’s tax treaties this section of the treaty provides that Canada may only tax a non-resident’s Canadian-source self-employment if the worker has an office or other fixed base in Canada[14].
Sales Tax Ramifications – Independent Contractor Status
Regardless of tax residency, if a remote worker working as an independent contractor who is other than a “small supplier” for GST purposes (i.e., a supplier with annual total taxable supplies of $30,000 or less), they would have an obligation to collect and remit GST/HST. They may possibly also have an obligation for provincial sales, depending on the requirements for the province(s) in which they provide services.
For GST/HST and provincial tax purposes, the place of supply for services in most instances is where the client is located[15].
Thus, an international remote worker performing services for one or more Canadian clients must ensure that they meet GST/HST obligations, including registering with the CRA to obtain a GST account, collecting GST/HST, and remitting collected sales taxes on a timely basis. Similarly, depending on whether services are provided to clients located in non-HST provinces, registration, collection and remittance may be required for one or more provinces.
Conclusion
Remote work performed for a Canadian company by a remote worker based outside of Canada presents multiple tax issues. This first part of a two-part series of articles reviewed key tax issues arising from such work arrangements. Among the key issues discussed are:
In the second part of the article series, we will explore the tax issues for the other side of the worker-company relationship, i.e., the Canadian company that hires the international remote worker.
FOOTNOTES
[1] Many remote workers are “digital nomads”, some of whom work in countries that offer digital nomad visas. These are temporary work visas specifically geared for international remote workers. Typically, a host country that issues a digital nomad visa will permit the international remote worker to temporarily reside and work in the country, provided that work is performed for outsiders only. Under such visas the digital nomad is not permitted to work for local clients, so as to not take jobs away from host country workers.
[2]
[4] The CRA’s Income Tax Folio S5-F1-C1 Determining an Individual’s Residence Status has a comprehensive discussion of tax residency for individuals.
[5] The jurisdiction’s tax residency rules must also be considered, to determine if the worker is deemed a tax resident of the jurisdiction. Additionally, if the remote worker is living in a jurisdiction with which Canada has a tax treaty, the tax treaty’s residency provisions, including the residency tiebreaker provisions, must be taken into account to arrive at a determination of the worker’s tax residency status for Canadian income tax purposes.
[6] Worthy of note is that, in the year that the individual becomes a non-resident, they may be subject to the departure tax. The departure tax arises from additional capital gains tax on the deemed disposition of certain types of property at their fair market value (FMV) on the date of departure. Information on the departure tax may be found at the CRA web page Dispositions of Property for Emigrants of Canada.
[7] Depending on the facts and circumstances, it is conceivable that a portion of the income for services provided by the remote worker to the Canadian company may result in foreign-source, rather than Canadian-source, income. For a brief but informative outline of income sourcing, see Thomson Reuters’ Foreign Income Sourcing: Keys to Successful Foreign Tax Credit Calculation.
[8] The employee would send a letter or waiver application to a CRA International Waivers Centre of Expertise. See “Non-resident Employees Who Carry Out Services in Canada” and “Application for a Waiver of Tax Withholding” in the CRA’s Employers’ Guide – Payroll Deductions and Remittances.
[9] The CRA’s Income Tax Folio S5-F1-C1 Determining an Individual’s Residence Status has a comprehensive discussion of tax residency for individuals.
[10] Worthy of note is that, in the year that the individual becomes a non-resident, they may be subject to the departure tax. The departure tax arises from additional capital gains tax on the deemed disposition of certain types of property at their fair market value (FMV) on the date of departure. Information on the departure tax may be found at the CRA web page Dispositions of Property for Emigrants of Canada.
[11] Depending on the facts and circumstances, it is conceivable that a portion of the income for services provided by the remote worker to the Canadian company may result in foreign-source, rather than Canadian-source, income. For a brief but informative outline of income sourcing, see Thomson Reuters’ Foreign Income Sourcing: Keys to Successful Foreign Tax Credit Calculation.
[12] OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), Article 4. See also OECD, “Updated guidance on tax treaties and the impact of the COVID‑19 pandemic” (OECD Policy Responses to Coronavirus (COVID‑19), 21 January 2021), which confirms that temporary dislocations caused by travel restrictions should not alter treaty residence under the tiebreaker rules.
[13] While employees are entitled to deductions for some employment expenses, such deductions are not as extensive as those allowable for self-employment income.
[14] For example, Article XIV Independent Personal Services of the Canada-U.S. tax treaty states “Income derived by an individual who is a resident of a Contracting State in respect of independent personal services may be taxed in that State. Such income may also be taxed in the other Contracting State if the individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base.”
[15] See the Canada Revenue Agency's webpages GST/HST for Businesses.
George Gonzalez, PhD is Associate Professor at the Calgary campus of the University of Lethbridge. He is a Chartered Professional Accountant (CPA, CA, Ontario) and a Certified Public Accountant (CPA, Florida). Gillian Holthe, CPA, CA, is an Instructor at the University of Lethbridge and a tax practitioner specializing in corporate and personal tax planning.
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