Generally, an individual may be taxed on employment income earned in Canada if the individual worked in Canada for as little as one day. The individual may also be liable for Employment Insurance and Canada Pension Plan premiums on the salary and other remuneration allocable to their employment in Canada. A foreign employer is liable to collect and remit to the Canadian tax authorities the amounts of income tax and other payments for its employees who work in Canada. The failure to collect and remit these amounts will result in the employer’s joint liability for the unpaid Canadian taxes.
An employee resident in a country with which Canada has a tax treaty or convention may claim an exemption under Article 15 of these tax treaties. Article 15 of the OECD Model Tax Convention, which language has been adopted by Canada in its tax treaties, provides the exemption from Canadian income taxation for the employment income earned in Canada. According to Article 15, if a foreign employer does not have a permanent establishment in Canada (ie, a fixed place of business as determined under Article 5), the employment income earned by an employee in Canada is not subject to Canadian income taxation if the employee spent fewer than 183 days in Canada. Canadian tax treaties do not apply to exempt an employee from paying Employment Insurance and contributing to Canada Pension Plan. Instead, an employee may find relief if Canada has entered into Social Security Agreement with their country. Like tax treaties, the purpose of a Social Security Agreement is to prevent individuals from double contributing to social security regimes.
It is indeed important to note that in some cases, including specifically the Canada-U.S. Tax Treaty, the long-term presence of an employee in Canada may create a permanent establishment in Canada of the non-resident employer, even if the employer does not have a fixed place of business in Canada, such as an office or factory. For example, an employee of a U.S. company who spent more than 183 days in Canada working on a project may create a permanent establishment in Canada for his employer, even if the employer does not maintain an office or other fixed place of business in Canada. In such case, the income earned by both the employer and the employee in Canada will be subject to Canadian income tax.
If the individual is eligible for relief from taxation in Canada pursuant to a tax treaty, either the individual or the employer can apply for a waiver from the Canada Revenue Agency (CRA) to alleviate the employer’s obligation from making payroll withholdings to CRA on the employee’s income earned while in Canada.
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