Breaking down the implications of remote work on taxes
A recent poll found that 48 per cent of employees are likely to work remotely some or all of the time after the pandemic (Getty Images/Todor Tsvetkov)
One of the legacies associated with the pandemic is that remote work is here to stay. As more employees opt to work from home, employers will need to manage the significant tax issues these arrangements can bring.
Indeed, a recent poll by Gartner, the global research and advisory firm, found that 48 per cent of employees are likely to work remotely some or all of the time after the pandemic, compared to 30 per cent before the pandemic began. As workforces get more mobile, employers can find themselves facing an array of new tax risks and obligations, especially when employees do their work cross-border.
The spike in home-based workers during the pandemic already caused disruption this past tax season, as practitioners and the Canada Revenue Agency (CRA) worked through millions of first-time tax claims for home office expenses. While the CRA simplified these claims for the 2020 tax year, the situation showed just how complicated these rules have become.
As the issues we discuss below show, home office expense claims are just one of many tax risks that businesses need to navigate. A second legacy of the pandemic—less certain but urgently needed—may be the attention it brings to this extreme tax complexity, and to the opportunity to update and simplify Canada’s rules through a federal government review.
WORKING ACROSS PROVINCIAL BORDERS
When employees and employers are located in the same province or territory, both are subject to the same tax rules. The issues that employers encounter are consistent with usual work arrangements.
But wrinkles arise when the employee works in a different province. For example, the CRA says employers need to make source withholdings from their employee’s pay based on the province or territory where the employee physically reports for work. How do you determine this in a remote work context? This question gets even harder to answer for employees of large companies who interact with colleagues in offices or operations in multiple jurisdictions.
When it’s not clear where the employee reports, the CRA allows you to state the employee’s location based on the source of their payment. Again, this is problematic in an increasingly digitized world, where a payroll can be centrally administered for all locations and the people managing that payroll can be spread across different jurisdictions.
The rules are more straightforward for employees. They pay provincial income tax based on the province or territory they live in. Payroll deductions might be mismatched if the employer is in a different location, but the difference is settled through a tax refund or payment at the end of the year or reduced withholdings during the year if an application is made.
For employers, however, payroll tax problems are just the start.
Where income tax is concerned, cross-border domestic issues include how to allocate a corporation’s income among the provinces and territories it operates in to determine each jurisdiction’s share of that income for tax. This is usually done based on the proportion of revenue and salaries connected to a “permanent establishment” in each province. The government defines this broadly, saying that a permanent establishment might exist in a province when, among other reasons, an employee or agent has general authority to enter into contracts for the corporation.
If a home-working employee has this authority, their home could count as a permanent establishment, causing a portion of the company’s salary and revenue to be allocated to the home office’s jurisdiction. While this might lead to only minor changes in amounts allocated to each province and territory, it could trigger requirements for filing provincial corporate tax returns in Alberta or Quebec (i.e., if the corporation is not otherwise taxable there).
CPA Canada and other stakeholders are in regular discussions with the CRA about these issues, encouraging them to review how the rules could be updated to suit a more mobile workforce. We’ve also asked for more clarity on remote work issues—for employers that may not know where employees are doing their work, or employees working in multiple jurisdictions, for example.
WORKING ACROSS NATIONAL BORDERS
Similar tax issues can crop up in an international context and, again, the pandemic has highlighted their complexity. [Read more about how organizations can ensure they are meeting all tax obligations when employees are working from abroad.]
Consider a worker who lives in a border city such as Windsor, Ont., and who, before the pandemic, commuted daily to a full-time job in Detroit. Under the usual rules, the United States would tax the employee’s income. The employee would also report the income on their Canadian tax return but avoid having the income taxed again by claiming a tax credit for foreign-source income.
When lockdowns were imposed and the individual worked from home, the tax situation regarding employees like these got much more complicated. Among other issues, in our example:
The U.S. employer now employs someone in a foreign country and needs to figure out their Canadian tax reporting responsibilities.
The Canadian employee needs to ensure the foreign employer withholds the right amount of tax.
The employee could create a permanent establishment for the U.S. employer in Canada, with the extra tax obligations this entails.
While the CRA has initiated special policies and guidance to ease the burden of some rules during the pandemic, these issues need more permanent consideration as the popularity of remote work continues. (See the CRA’s website for details on COVID-19-related relief for cross-border workers.)
In the meantime, employers are advised to keep tabs on the locations of their remotely working employees and to keep these tax issues in mind when determining their policies for allowing employees to work virtually across domestic and international borders.