Top 10 year-end tips for global mobility and assignment professionals
Canadian Tax Alert, Global employer services
December 6, 2011
Many Canadians approach New Year’s Eve as a chance to make a fresh start. With this in mind, we offer our top-10 tips to help you start fresh at the office in 2012.
10. Stock option exercise withholdings. Pursuant to changes introduced in the March 2010 Canadian budget, employers must now withhold Canadian income taxes (and potential Canada Pension Plan contributions) on the exercise of employee stock options, without being able to rely on “undue hardship” arguments to waive withholding. Further, employers must treat option benefits as bonuses; as such they must remit the taxes by the normal remittance due date for that payroll period and not simply withhold them from future cash remuneration. Please note that the Canada Revenue Agency (the CRA) is still reviewing its position with respect to acceptable withholding processes in this context.
9. Payroll waivers. A constant source of frustration among administrators is trying to obtain a complete list of all the non-Canadian employees who will be travelling periodically to Canada to work in the coming year. Even where the employees are exempt from Canadian taxation, they are still subject to Canadian income tax withholdings unless a waiver is obtained for them prior to the first day of the year in which they are paid for services that include Canadian workdays. While employees and employers have to complete the new Form R102-J (i.e., for Americans with less than $10,000 of Canadian source wages, or residents of another treaty country with less than $5,000 of Canadian source wages), administrators still need to obtain a complete list of such employees and obtain waivers for all of them. During 2011, the CRA also released new form R102-R, regulation 102 Waiver Application to be used by a non-resident employee providing services in Canada to apply for a waiver of the tax required to be withheld if he/she meets other conditions for exemption pursuant to a tax treaty between Canada and the country of residence. As mentioned above, waiver requests should be completed and filed in order for the authorizations to be received before the first payment of compensation in 2012. You should also note that a new process is expected to be launched in 2012 by the CRA, the “Employer Certification Process”, whereby employers will be able to benefit from an easier process to obtain these waivers for a group of employees on short term assignments in Canada, provided they meet certain criteria and have implemented adequate processes. We expect more information to be provided in the coming months.
8. Ensuring accurate T4 reporting. Administrators will invariably encounter a senior executive each year whose T4 slip does not accurately reflect his or her total global compensation, thus leading to a series of sometimes frustrating calls between the executive and various firm departments. The issues are compounded with mobile employees where complex equalization, gross up, assignment-related benefits and foreign tax issues must be addressed. These conversations are better conducted in December than the following April 29. An even better proactive solution would be the implementation of an integrated payroll system that takes all of the components into account.
7. U.S. plan participation and pension adjustment T4 reporting. Since 2009, the Canada – U.S. Tax Treaty has allowed employees to claim a deduction and exemption on their Canadian tax return for employee and employer contributions made to a U.S.-qualifying retirement plan (such as a 401(k)). This also extends to individuals who are not residents of Canada. While this could be beneficial to the nonresident executive, it is an added administrative burden to the payroll department, which would then have to calculate the pension adjustment to report on the nonresident executive’s T4 slip as a result of such U.S. pension plan participation (though they have always had to do so for resident executives) .
6. Non-resident directors and payroll withholding/reporting. With an increasing focus on mobile employees and Canadian directors, it is easy to forget the special attention that must be paid to nonresident directors. The payroll administrator should decide the extent to which their retainers and other compensation (such as deferred share units (DSUs)) are subject to Canadian income tax withholding and T4 reporting, and be sure to exempt them from Employment Insurance and (if they perform a portion of their duties outside Canada) Canada / Quebec Pension Plan contributions.
5. Tracking international workdays. Internal accountants know what question sends many executive assistants scrambling each March: “where has the executive worked each day of the prior year?” Frustrating though it may be, accountants need to know how many workdays were spent in each country and each U.S. state (and for non-Canadians, each province) in the prior year so that the appropriate filings are made and foreign tax credits claimed. The process is much simpler when this information is compiled before the year end – a better approach is to implement optimal processes, such as contemporaneous tracking logs, before the start of the year.
4. Totalization agreements and certificates of coverage. While not strictly a year-end requirement, it is always good to take an inventory of the executives who are already on, or will be going on, short term foreign assignments (generally, less than five years) to countries with a social security (totalization) agreement with Canada. This is to ensure that a certificate of coverage is obtained from the CRA, to verify that a certificate that has been applied for has been obtained, or to ensure that certificates that are about to expire are renewed (in case a foreign tax authority mistakenly starts requesting payment of its own local social security taxes). Similar requirements are applicable for employees on assignment from Quebec.
3. Compensation plan deferrals. Particularly if required by U.S. section 409A for U.S. taxpayer executives, many compensation plans require that the employee or director elect what portion of his or her annual salary/bonus for the upcoming year to defer by December 31 of the year preceding the year of services. The plan administrator must thus ensure that the appropriate election forms are mailed out and returned completed by December 31.
2. International business travelers. We have seen increased activity from the taxation authorities with respect to payroll audits, particularly in the area of compliance for international business travelers. As mentioned above, various points should be considered for this category of employees in addition to obtaining adequate immigration / work authorizations, depending on their role in Canada. To meet the employer and employee tax obligations, adequate processes would include: implementing a tracking system to determine where they work, analyzing possible exemption under a tax treaty and applying for a waiver when possible, or remitting applicable income and social taxes. Year-end reporting of total compensation taxable in Canada can also be a challenge for employers when internal processes are incomplete.
1. New Year’s Eve celebration. By far, the most popular item on every administrator’s list is to ensure that all of the above is accomplished by December 31 so they can toast a successful year.
Peter Megoudis – Toronto
Chantal Baril – Montreal
An earlier version of this article was published in 2010 by the Canadian Employee Relocation Council.
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