Rewind four years, and the notion that at least one-third of all jobs could be carried out both effectively and efficiently by remote workers would have seemed impossible. Of course, that was before the global pandemic came along and redefined the business landscape and the way we approach employment in general.
Fast forward to 2023, and more than three-quarters of the workforce report a desire to work remotely. The pandemic showed us that hybrid and work-from-home models were not only viable options but, in a large number of cases, actually preferable for both employees and employers alike.
In this new, flexible business environment, workers are no longer tied to a fixed location. Remote work gives them the freedom to move away from cities where the cost of living is usually highest, in favour of areas that are cheaper, closer to family or offer an all-around better quality of life.
With the possibility of these new locations being in different provinces, territories or even countries, it is important to consider the tax implications and obligations for employers with remote workers.
Determining Remote Workers Province or Territory of Employment
If your company employs remote workers, then you are required to determine their province or territory of employment in order to make the correct payroll deductions and remittances. Once you figure out your employee’s province or territory of employment, you can simply consult the applicable Payroll Deductions Tables for specific instructions on the withholding rules for income tax, Canada Pension Plan (CPP) and Employment Insurance (EI).
The main criteria for determining a remote worker’s province of employment is whether or not they physically report to work at the establishment of the employer. According to the CRA, for income tax purposes, the establishment of the employer does not have to be a permanent location and is defined as:
“Any place or premises in Canada that is owned, leased or rented by the employer and where one or more employees report to work or from which one or more employees are paid.”
Remote Workers Reporting to a Physical Location
If the employee reports to your establishment in person, then their province or territory of employment will be where the business that they report to is located. Take a look at the following examples to see how this works:
- Your head office is in Alberta, but your employee reports to your place of business in Ontario. In this case, you would use the Ontario Payroll Deductions Tables.
- Your employee lives in Ontario but reports to your place of business in Quebec. In this case, you would use the Quebec Payroll Deductions Tables.
There are no rules on the minimum amount of time an employee has to report to the establishment of the employer. This is a key point for hybrid workers who work remotely for the majority of their hours but still report to a physical location at certain times.
It is important to note that working remotely across provincial borders can result in employees having too much, or potentially too little tax withheld at the source. While this will be rectified when they file their taxes, they may need to obtain a letter of authority to reduce deductions or ask their employer to increase their deductions at the source.
Remote Workers Not Reporting to a Physical Location
For fully remote employees who do not have to report to a physical location, their province or territory of employment would be the one from which they receive their salary and wages. This is generally the province or territory where the company’s payroll department or head office is located.
For example, let’s say your company is based in British Columbia, but you have an employee who has decided to make the most of their fully remote position and move to be with family in Ontario. In this case, B.C. would be the employee’s province of employment, as this is where their paychecks are coming from.
Be aware though that this can result in unexpected costs for the employer, as each province or territory has separate tax laws and policies, as well as its own individual health and compensation programs. In the example given above, B.C. Employer Health Tax would be levied on the remuneration paid to the employee, even though the employee resides in Ontario.
Foreign Companies with Remote Workers in Canada
Businesses based outside of Canada that hire Canadian-resident employees still have to adhere to Canadian payroll filing and remittance rules. To do so, they must obtain a Canadian business number and open a payroll program account with the CRA. The amounts that must be withheld for federal and provincial taxes, CPP contributions and EI premiums are calculated based on the employee’s worldwide income. The foreign employer must report these amounts on T4 slips and remit them to the CRA to avoid significant penalties.
Provided that the foreign company does not have any establishments within Canada, they should refer to the In Canada Beyond the Limits of Any Province/Territory or Outside Canada supplementary tables in order to calculate the correct deductions and remittances.
Being a small business in a large market is like being a little fish in a big pond; every day is a constant battle for survival, and sooner or later a mutant catfish is going to swallow you whole! The solution is to make the pond as small as possible.
Market segmentation is an ideal growth strategy for companies faced with the challenge of securing a foothold in a large market filled with bigger companies. The four basic types of market segmentation are: geographic, demographic, psychographic and behavioural. But each of these can be broken down again and again into smaller and smaller segments.
By separating one large market into smaller, focused segments, a company can tailor its specific products and services to specialized individual groups. This is far easier than trying to market products to a broad, generalized customer base, and allows for different products to be targeted at different customers.
Canadian Employers with Foreign Remote Workers
On the flip side, Canadian employers with foreign-resident remote employees have similar requirements to meet. One of the most common examples of this that we see here in Canada is when Canadian employers hire remote workers living in the U.S.
In this scenario, the Canadian employer would be required to withhold U.S. federal and state income taxes, FICA social security and Medicare as well as any other state-specific unemployment or disability deductions. This generally means applying for an Employer Identification Number and a U.S. payroll account.
Tax withholding rules for Canadian companies that hire foreign-resident remote workers are defined by the country in which the employee is based. Each country has their own requirements, and therefore it is the responsibility of the employer to review the specific obligations that apply to them.
A Note on Remote Work and International Corporate Tax
One of the biggest concerns for employers hiring foreign employees is the potential for opening their company up to corporate tax filing obligations. By employing foreign-resident workers, a company may inadvertently create a corporate presence in the country where the employee is based and would therefore be considered to be carrying on a business in this foreign jurisdiction.
As such, companies that employ remote workers in foreign countries should conduct a full review of their business presence in those countries and consult any income tax treaties or provisions that might exist in order to determine their tax obligations.
Payroll Deductions Tables
As we’ve seen, in order to help employers calculate their tax withholding responsibilities correctly, the CRA provides a set of Payroll Deductions Tables. There are separate tables for each province and territory within Canada, as well as a supplementary table that covers circumstances outside of provincial or territorial borders. If you’re still not sure which table to use, consult the most common examples provided by the CRA below:
Notes:
- If an employee reports to multiple establishments in different provinces or territories, use the tables for the province/territory where the employee spends the most time.
- Canadian employers with employees who are ‘deemed residents’ should use the tables for ‘In Canada beyond the limits of any province/territory or outside of Canada’.
- For payments outside of employment income, such as pension income, retiring allowance, or RRSP, employers should use the tables for the recipient’s province or territory of residence.
Final Thoughts
With a huge surge in the popularity of remote work, more and more companies are moving away from traditional office spaces and 9-5 work weeks in favour of a more flexible approach. And while certain jobs will always require physically present workers (until the robot uprising that is), we are seeing a rapid increase in the number of employees looking for hybrid and work-from-home employment opportunities.
In an ever-tightening labour market, employers are having to adapt to this new reality, rethinking and redesigning their operations in order to attract and retain top talent. While this opens up a whole new realm of opportunities, it is vital that employers review the tax implications and understand their obligations before hiring remote employees.
The aim of this article has been to provide a general overview of employer considerations from a tax perspective. However, in order to determine the full tax and financial ramifications of employing remote workers, employers should consult with a tax professional.
For expert advice and solutions tailored to your specific situation, get in touch with our Taxation Team today.
