How Does the Canada Emergency Wage Subsidy Apply to Non-Resident Employers?

The much-welcomed Canada Emergency Wage Subsidy (CEWS), enacted on April 11, 2020 (Bill C-14), may apply in unexpected ways to non-resident entities that send their non-resident employees to Canada. In general, to qualify for the CEWS, an employer must:

  1. be an eligible entity;
  2. experience a decline in qualifying revenue;
  3. employ an eligible employee;
  4. pay that person eligible remuneration in a qualifying period; and
  5. have a payroll account on March 15, 2020.

Consider the case of a US-resident corporation, NR Co, that provides services in Canada. It does not have a permanent establishment in Canada under the provisions of article V of the Canada-US tax treaty, in particular the so-called deemed services provision of article V(9). It does have a payroll account in Canada, which it maintains in respect of its US-resident employees who work in Canada on an intermittent basis. These employees are allowed to travel to Canada during the COVID-19 pandemic under the essential services exception to the border restrictions. Assume that NR Co had the requisite decline in qualifying revenue for the relevant periods from March 15 to August 29, 2020.

Assume that A is an employee of NR Co, is a tax resident of the United States, and works in Canada for three days during the period March 15-April 11, 2020 and in the United States for the remainder of the period. A is paid a salary by NR Co for the entire period. Is NR Co entitled to a CEWS benefit in respect of all of the wages paid to A?

NR Co is an eligible entity because it is a corporation and is not exempt from tax. In CRA document no. 2020-084779 (May 8, 2020), the CRA says that the words "exempt from tax" in paragraph (a) of the definition of an "eligible entity" in subsection 125.7(1) are meant to exclude, generally, corporations described under subsection 149(1). Therefore, a non-resident corporation that is not subject to Canadian income tax under the relevant tax treaty can qualify as an eligible entity.

To qualify for the CEWS, NR Co must pay "eligible remuneration" as defined in subsection 125.7(1). The salary paid to A in respect of the services performed in Canada will qualify only if NR Co has not applied for a non-resident employer certification pursuant to paragraph 153(7)(a). Eligible remuneration is defined as amounts described in paragraph 153(1)(a) or (g). These paragraphs generally include salary, wages, or other remuneration paid to an employee. However, amounts paid at any time by an employer to an employee at a time that the employer is a "qualifying non-resident employer" and the employee is a "qualifying non-resident employee" are excluded. These amounts are not subject to the employer withholding requirements of section 153 and regulation 102. If NR Co chooses not to file an application pursuant to paragraph 153(7)(a) to be classified as a qualifying non-resident employer, or is not eligible to be considered a qualifying non-resident employer for some other reason (for example, failing to comply with the requirements of the certified non-resident employer program), it would be liable to withhold, but it would be eligible for the CEWS.

Also, pursuant to the definition of eligible remuneration in subsection 125.7(1) and the references to paragraphs 153(1)(a) and (g) in the definition, eligible remuneration is not specifically limited to the salaries and wages paid for the services performed in Canada. However, note that under the salary withholding requirements applicable to non-resident employers that do not qualify under the certified non-resident employer program, regulation 104 generally limits the withholding to "remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by [a] non-resident person."

It is not clear at this time if a proper interpretation of the CEWS legislation would require the CRA to apply a similar approach to the calculation of eligible remuneration for the purposes of the CEWS. If it does not, a non-resident employer may claim the subsidy for all of the wages paid to a non-resident employee during the qualifying period regardless of the number of days actually spent working in Canada.

Our example illustrates this anomaly. A performed services in Canada from March 15-17, 2020 and was paid for the entire period from March 15 to April 11, 2020. Read literally, the definition of "eligible employee" requires only that an employee be employed in Canada by an eligible entity in the qualifying period and receive remuneration in respect of 15 or more days from the eligible entity during the qualifying period. In the given fact pattern, could NR Co claim a subsidy for the full amount of A's salary during the qualifying period (March 15-April 11, 2020) even though the eligible employee worked in Canada for only three days?

It is unclear whether the legislation should be applied in this way, but such a conclusion seems possible on a literal reading of the provisions. It does seem anomalous to us that Parliament would want to provide a subsidy to a non-resident employer in respect of wages paid for services rendered outside Canada. To date we are unaware of how the CRA might administer the provisions in circumstances such as those outlined here.

Alex Ghani, Stan Shadrin, and Boris Volfovsky
CPA Solutions LLP, Toronto

COVID-19 and Canadian Tax
A special joint issue of Canadian Tax Focus and Tax for the Owner-Manager
July 2020
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