First and Foremost: Notify Your Employer
Telecommuting abroad can have tax implications for the employer, including the possible recognition of a company’s permanent establishment abroad, especially if the employee remains in the same place. Take the example of an employee who wishes to spend his winters in the south. This situation could lead the employer to declare, withhold and pay tax in the host country. This is why, before planning to telework abroad, you should inform your employer of your intentions. This transparency is essential to enable the company to analyze the tax implications of this situation and anticipate any steps to be taken. What’s more, your employer may review your terms and conditions of employment.
It is also essential to discuss the respective obligations of employer and employee when teleworking abroad. For example, the application of the withholding tax could be affected and will need to be taken into account by the employer. (And what about cybersecurity? Is your employer’s VPN accessible from another country? Will you have access to a secure Wifi network?)
Remember that the tax impact of teleworking abroad can vary depending on a number of factors, such as the location chosen and the length of stay. Let’s take the same example as above: if you go to the southern United States for the winter, the impact could be different than if you went to Asia, or certain Central American countries. The impact could also vary if you change country several times. Hence the importance of good communication between employee and employer for optimal tax planning.
Tax Residence: Where and How Do I File my Tax Return?
In Canada, there are three possible tax residency statuses for a given taxation year: factual resident, deemed resident and non-resident.
A de facto resident is a person who travels or lives outside Canada, but maintains significant residential ties in Canada. Significant residential ties include a home, a spouse/common-law partner and dependents in Canada. Other secondary residential ties may be relevant, such as economic or social ties with Canada. A de facto resident is therefore considered a Canadian resident by the Canada Revenue Agency.
A deemed resident is a person who has stayed in Canada for 183 days or more in a given taxation year, who has no significant residential ties in Canada, and who is not considered a resident of another country under a tax treaty between Canada and that country. It is important to note that a stay may exceed the prescribed period, even if it does not consist of consecutive weeks. In other words, if a person spends 90 days outside Canada and returns for 30 days, he or she will have only 93 days left to spend outside the country. In short, the tax obligations of a deemed resident are to declare all income from all sources, claim all applicable deductions and tax credits (federal tax credits only), and qualify for the Goods and Services Tax/Harmonized Sales Tax credit.
A non-resident of Canada is a person who has no residential ties in Canada and who has lived outside Canada for the entire taxation year or has been in Canada for less than 183 days during the taxation year. A non-resident of Canada is taxed under Part I tax or Part XIII tax.
Setting up your workspace abroad, whether in a single country or in several, can therefore have an impact on your status, depending on the length of your stay and whether or not you retain residential ties with Canada. In turn, your tax residency status will have an impact on your tax obligations.
In addition to Canadian tax obligations, depending on the country where you set up your new workspace and the length of your stay, you may also face various tax obligations abroad. That’s why it’s important to find out about the country’s tax rules, and to ask yourself questions such as “How do I declare teleworking? and “Is teleworking deductible?
Within the European Union, for example, the principle of tax residency is simple: you are a tax resident in the country where you stay for more than 183 days in the year. However, the situation can become complicated if you reside in several countries during the year. Other specificities may come into play. For example, the tax treaty between France and Canada stipulates that the salary earned by a French resident working for a Canadian company must be taxed in France. In addition, your company may be required to register with the tax authorities in the country where you work.
Then you may be subject to double taxation. Double taxation means having to pay tax twice, because of certain tax laws. In response to this problem, Canada has signed tax treaties with about a hundred countries around the world.
Are Home Office Expenses Tax-Deductible?
In Canada, certain expenses incurred for your workspace can be deducted by completing form T777. In Quebec, the form to be completed is the TP-59. However, tax rules vary from country to country. So it’s important to understand your tax residency status and find out about the rules in your host country.
How Do you Calculate the Tax Credit to Be Taken Into Account When Filing Your Income Tax Return?
The foreign tax credit is an important measure designed to minimize the consequences of double taxation for foreign teleworkers. If you pay tax on income earned outside Canada, it’s possible to claim a non-refundable tax credit from the Canada Revenue Agency (CRA). To do so, you must provide the name of the country where you earned the income and declare your profits, losses and gains.
Documents to Be Completed in Canada
In Canada, you may be entitled to the federal foreign tax credit. Note that the amount of your credit is calculated by completing Form T2209 – Federal Foreign Tax Credits and forwarding it to the CRA. You can then claim the credit on line 40500 of your income tax return.
Documents to Be Completed in Quebec
In Quebec, the foreign tax credit is also available under certain conditions. To calculate your provincial credit, complete Form 428.
To Remember When Filling Out Your Tax Return
Canada’s tax treaties with other countries may limit eligibility for these tax credits. It is therefore advisable to consult a tax expert to understand the specifics of your situation and ensure that you meet the eligibility criteria.
Social Security Contributions and Deductions At Source for Employers and Employees
Employers in Canada pay payroll taxes and make deductions at source. Payroll taxes are amounts paid by the employer in addition to the gross salary, including, for example, contributions for employment insurance and the Canada Pension Plan. If you telework abroad, these payroll taxes may be affected. Thus, the place of work can influence the management of social charges. Depending on the country, bilateral agreements may be in place to avoid double taxation.
Deductions at source are amounts taken directly from the employee’s salary to cover taxes and benefits. If the amount deducted is insufficient, the employee could find himself with a tax balance to pay to the CRA at the end of the year. To avoid unpleasant tax surprises, it’s essential to understand and anticipate these issues.
In conclusion, the tax implications of teleworking abroad are vast and complex. What’s more, these impacts depend greatly on the situation, which can vary depending on the country, length of stay, tax treaties, etc.
