Tax Implications of working for a US employer while living in Canada
COVID-19 has changed many aspects of our lives, including the possibility of working remotely. As a result, we have seen a trend where various professionals such as IT employees working for Google, Facebook, etc. who otherwise reside in the US, decided to take the opportunity to spend time in Canada while remaining employed by their US employer.
That said, there are various tax implications that could arise for both the employee and employer that must be taken into account. Under Article XV of the Canada / US Tax Treaty, a US resident could be potentially subject to Canadian tax on the salary earned from a US employer. If an individual is present in Canada for more than 183 days during any rolling 12-month period, the CRA has the right to tax the Canadian sourced portion of the US salary based on a pro-rata of days spent in each country.
Let us take an example of an IT professional working for Facebook and let us assume this individual is also a California resident. If the Facebook employee spent over 183 days in Canada in 2020, he will need to pro-rate the number of days worked in Canada and pay tax on the portion of his salary to CRA as discussed earlier. This employee will be eligible to claim a foreign tax credit on the Canadian tax paid on the income up to the amount of the US tax paid. Since Canadian tax rates are higher and the tax brackets are more compressed, this individual will end up paying the higher of the Canadian and US tax on the income.
That said, California which is a nontreaty abiding state, does not grant a foreign tax credit for the Canadian federal or provincial tax paid. This would result in a form of double taxation. In addition, cash flow issues may arise, as the Canadian tax owed on April 30th would likely be payable prior to receiving a refund from the IRS.
The employer would also have a responsibility to withhold Canadian tax through payroll deductions if their employee is living in Canada. Failure to do so can result in penalties for the employer by the CRA. This can be avoided if the employer requests a formal waiver from Canadian payroll tax through the Regulation 102 waiver.
As you can see there are various complexities associated with working remotely in another country. To ensure you remain tax compliant, avoid various cross border tax traps and double taxation on your employment income, it is advisable that you consult with a cross border tax professional.