Remote-work reality imposed by COVID-19 raises some important questions for employers
The COVID-19 outbreak has forced drastic and radical change upon companies and industries across Canada, including a much wider adoption of work-from-home practices. For many employers already faced with considerable about their business’s future, this adds even more questions, including its possible ramifications on income taxes.
One particular question, raised by Dean Xiao, Kim Brown, and others from McCarthy Tetrault LLP in a recent article, concerns the impact of an employee’s working from home on their employers’ income tax withholding obligations, particularly if the employee is in a different province. According to the piece, that turns on whether the employee’s home office could constitute a “permanent establishment” of the employer for provincial income tax purposes.
“A Canadian-resident corporation is subject to provincial or territorial corporate income tax if it has a PE in the province or territory,” Xiao and his co-authors said. A corporation is taxable in each province or territory in which it has a PE, with its taxable income being allocated to each PE so that two or more provinces or territories don’t end up taxing the same income.
One consideration would be whether the home office would be counted as a “fixed place of business” for the company. Generally, the article authors said, the Canada Revenue Agency (CRA) and Canadian courts have concluded that a home office set up by an employee to discharge their duties under an employment contract would not be considered a PE of the employer.
In the case of the courts, that applies so long as the home office space is not under the employer’s control and “would not be objectively identified with the business of the employer,” such as if the home office had the company name displayed publicly or if the home office was listed as a place of business for the employer.
Noting that an employers’ payroll withholding obligation applies to any payment of remuneration made to an employee who “reports for work at an establishment of the employer,” they said that the amount to be withheld is calculated based on the tax rates of the province where the employee reports for work. “[I]n circumstances where an employee works out of a home office full-time, the CRA has stated that the employee is generally not considered to report for work at an establishment of the employer,” they said.
But they further clarified: “if an employee is not required to report for work at any establishment of the employer … the employee is deemed to report for work at the employer's establishment from which is paid the remuneration that is salary, wages, or commissions.” An example of that would be a full-time employee working from home in the context of the COVID-19 pandemic, they said.
“As the employees would be required to work solely from home, they would be deemed to report for work at the employer's establishment from which they are remunerated … and the applicable payroll withholding rates would apply based on the location of such establishment,” they said.