Canadian Remote Workers: New Tax Guidance
The emergence of remote work in recent years has created some questions for Canadian employers on a variety of fronts, including in the area of tax compliance. One specific issue is how to determine which provincial or territorial rules apply to remote workers. The Canada Revenue Agency (CRA) has recently published an administrative policy (New CRA Policy) which provides some helpful direction for employers.
The New CRA Policy, which took effect on January 1, 2024, clarifies the approach which will be applied by the CRA for determining the province or territory of employment (POE) for payroll deduction purposes in the case of employees who work remotely pursuant to a full-time remote work agreement. The New CRA Policy applies going forward for the purposes of Canadian income tax, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Employment Insurance (EI), and Quebec Parental Insurance Plan (QPIP) deductions. For all other purposes, including in particular Ontario’s Employer Health Tax, the existing legislation and related rules will remain unchanged.
Why Is a Province of Employment (POE) Required?
In each case where a Canadian employer pays employment income to employees (such as a salary, hourly wages or commissions), there is a requirement for the employer to determine the POE which applies to the specific employee. This determination is required because there are different deductions rules and related amounts which apply across the country, which impacts the amounts of the payroll deductions which must be withheld and remitted for income tax, CPP/QPP, EI and QPIP.
The applicable POE for Canadian employees depends on whether the employee reports to work at an establishment of the employer (either physically, or as outlined, by virtue of being deemed to be “attached” to an establishment). If the employee works in Canada but does not report for work at an establishment of the employer, the POE is the province or territory where the establishment of the employer from which the employee’s salary is paid. As a general rule, the establishment which is considered to pay the salary will be either: (1) the location of the employer’s payroll department or payroll records; or (2) the establishment which actually incurs the expense for T2 corporate income tax reporting purposes.
Employer’s Establishment
The New CRA Policy provides that, for the purposes of Canadian income tax, CPP and EI requirements, the CRA considers an establishment of the employer to be any place or premises in Canada that the employer owns, leases or rents, and where employees report to work or from which employees are paid. This does not need to be a permanent physical location and can include temporary physical locations such as a construction job site.
The New CRA Policy also says that an employee’s home office will generally not be considered an establishment of the employer. However, there can be cases where a home office will be considered to be an establishment of the employer, including where the employee has general authority to contract for the employer, or where the employee has an inventory of merchandise owned by the employer from which they regularly fill orders.
New CRA Policy: Remote Workers
The CRA has now advised that, where an employee is a resident in Canada for the full calendar year, that employee is considered to be reporting for work at an establishment of the employer if one of the following applies: (1) The employee physically reports for work at an establishment of the employer, in which case, there is no minimum amount of time the employee has to report to that place; or (2) where a “full-time remote work agreement” exists between the employer and the employee, then the employee can be reasonably considered “attached to an establishment of the employer.”
The New CRA Policy outlines the following features of a “full-time remote work agreement”:generally considers a full-time remote work agreement to exist between the employer and the employee when the following arrangements are made:
The agreement can be either temporary or permanent;
The employer directs or allows the employee to perform their employment duties full-time (100%) remotely; and
The employment duties are to be performed at one or more locations that are not establishments of the employer.
The CRA position is that both the employer and the employee must be able to demonstrate that a full-time remote work agreement was made. If this can be proven, then the rules as outlined in the New CRA Policy. The result is that it will then become necessary to determine if the employee is reasonably considered to be “attached to an establishment of the employer.” If a full-time report work agreement was not made or cannot be justified or proven by the employer and employee, then the New CRA Policy will not apply.
Attached to an Establishment of the Employer
For cases where the New CRA Policy applies, there is now greater clarity about which establishment an employee will be considered “attached to”. This determination involves a fact-specific inquiry about the arrangements between the employer and employee.
The primary indicia used to determine if an employee can reasonably be considered "attached to an establishment of the employer" is to review what arrangement would likely apply if there were no full-time remote work agreement in place. In other words, the first point to consider is where the employee would physically report to work to carry out their job functions if remote work arrangements were not in place. In the case of any employees who physically reported to an establishment of the employer immediately prior to entering a full-time remote work agreement, the New CRA Policy provides that such establishment is generally the one to which they would be reasonably considered to be attached. So the “old office” is generally used as a default. However, the New CRA Policy also provides that this approach can be modified if the employee’s circumstances have changed, particularly with regard to their job duties being different.
In cases where the primary inidicia either provides no answer, or the circumstances have changed, the CRA will apply a list of secondary indicia in order to determine the location of the relevant employer establishment which the remote employee will be considered to be attached to. The items which the CRA will consider (as a group, taken together) are as follows:
The establishment where the employee attends or would attend in-person meetings, through any type of communication.
The establishment where the employee receives or would receive work-related material or equipment or associated instructions and assistance.
The establishment where the employee comes or would come in-person to receive instructions from their employer regarding their duties, through any type of communication.
The establishment that is responsible for or supervises the employee, as indicated in any contractual agreements between the employer and the employee.
The establishment to which the employee would report based on the nature of the duties performed by the employee.
The rules as outlined above should hopefully assist employers and employees with the taxation and related issues arising from remote work. That said, there may still be cases where a particular employees might reasonably be considered to be attached to more than one employer establishment. The New CRA Policy recognizes this, and provides that the focus will then be on which establishment the employee will be considered to more closely attached to.
Takeaways for Employers
Remote work is almost certainly here to stay, and most Canadian employers recognize that, at least to some degree. For cases where the position involves a full-time remote work agreement, the CRA has now provided helpful guidance about how income tax and other statutory deductions will be treated. This will hopefully lead to reduced uncertainty about applicable rules and the related compliance obligations.