International Tax Issues Created by COVID-19
The ongoing COVID-19 pandemic has forced changes in all aspects of life. One of the main changes being the imposition of travel restrictions to and from Canada for citizens, non-residents and vacationers. The travel restrictions imposed by Canada and many other countries worldwide, has had the unforeseen consequences of forcing people to stay longer than intended in other countries, having a drastic impact on their tax consequences. This blog post is designed to help navigate these complicated Canada Revenue Agency (“CRA”) adjustments.
The rules that will be described below apply to situations that occur or have occurred between March 16, 2020 to August 31, 2020, at which point the CRA will review and determine if they need to be extended further.
Income Tax Residency and COVID-19
In general, an individual’s residency determination for Canadian tax purposes is based on a common-law factual test. The determination is made based on an individual’s residential ties to Canada (location of permanent place of residence, family members, bank accounts, etc.). In addition, an individual who sojourns (meaning physically present) in Canada for 183 consecutive days or a total of 183 days in a single tax year, will be deemed to be a resident.
Some individuals may have been forced to stay in Canada longer than originally anticipated due to travel restrictions placed by Canada or their country of residence. The CRA has stated that where the individual has remained in Canada solely because of COVID-19 related travel restrictions, the travel restricted days will not count towards the 183-day sojourn requirement. Moreover, the CRA will not take into account any of those days spent in Canada towards their common law test of residency (the common law test stems from Thomson v. Minister of National Revenue).
Under Canadian tax law, foreign corporations (corporations established under foreign law) can be considered a resident of Canada if their “central management and control” is located in Canada (stemming from the English case of De Beers Consolidated Mines v. Howe [1906] A.C. 455 (HL)). One of the main factors in determining central management and control is where the board meeting takes place. If due to COVID-19 travel restrictions, a board member is stuck in Canada, unable to leave and must attend board meetings from Canada, the CRA will take this factor into account when determining residency. The CRA will also look to applicable tax treaties where appropriate.
Carrying on Business in Canada / Permanent Establishment
Another potential issue caused by COVID-19 travel restrictions, is that generally speaking, non-residents and non-resident businesses only pay taxes on their income that stems from “carrying on business in Canada”. What will then happen to employees who regularly perform their working duties outside of Canada, but due to travel restrictions, have to perform their duties in Canada? Will they be considered to be a resident, or have a permanent establishment in Canada? The CRA has confirmed they will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their duties in Canada due to travel restrictions.
Similarly, the CRA will exclude any days present in Canada due solely because of travel restrictions in their calculation of the 183-day presence test in the applicable tax treaties (such as Article V(9)(A) of the Canada-United States Income Tax Treaty).
Cross-Border Employment Income
Under the Canada-United States income tax treaty, Canada is permitted to tax an individual’s salary, wages and other similar remuneration derived by a resident of the US in respect of any employment services provided in Canada. However, some of the remuneration is not taxable in Canada if a) it does not exceed $10,000 or, b) the person is present in Canada for less than 183 days. The CRA has clarified that where such an individual is present in Canada, and exercising their employment duties in Canada, solely due to travel restrictions, those days will not count towards the 183-day total.
Sale of Canadian Property by Non-Residents of Canada
Under Canadian income tax legislation, a non-resident vendor who disposes of taxable Canadian Property must notify the CRA within 10 days after disposing of it, or at any time before officially disposing of it. Whenever the CRA receives either an amount to cover the tax on the gain from the sale of the property, or tax from a gain the vendor will realize at a later date, the agency will issue a certificate of compliance to the vendor (a section 116 certificate). Vendors needs these certificates in order to avoid penalties in the future.
Due to COVID-19, the processing of these requests was temporarily interrupted. Thankfully, the CRA has confirmed that if you are a vendor who submitted a S.116 request and the certificate has not been issued by the time the purchase happened, the purchaser or vendor can request the CRA to provide a comfort letter. This letter advises the purchaser/vendor to retain the funds they have withheld, until the CRA’s review is complete. The CRA will not assess penalties or interest on these COVID-19 related delays.
Overall, the CRA has stated that there will be hearing matters involving delays in travel due to COVID-19 travel restrictions on a case by case basis. Meaning that your specific fact scenario, might entitle you to taxation relief even if you did not meet any or all of the requirements mentioned above. On the opposing end of the spectrum, even if you fit into these rules and requirements, you may still end up owing taxes to the CRA based on their determination. If you feel that your situation requires some assistance, R&A Tax Law can help. If you have any questions, feel free to call us and schedule a consultation now!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
James Pendergast