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Tax Season 2006 Retrospective: Fixes for Next Year

CompassPOINTS - June 2007

By Diana Matwichuk, Manager Assignment Planning Services

It seems that there is always something that stands out during an expatriate tax reporting season that could be remedied for next year. What better time than the present to reflect, analyze and implement changes that will ensure improvements for Tax Season 2007.

1. T4 Issues

If your company had to issue amended T4’s to expatriate employees this year, you are not alone. We observed during preparation of expatriates’ tax returns that this was a common 2006 phenomenon for Canadian employers.

Amended T4’s are accepted by the CRA, but the risk is that if they are issued late, preparation of both Canadian and US tax returns is in turn also held up, and penalties are levied for late returns in a payable position. Given that the US tax reporting deadline is normally April 15, and the Canadian deadline is April 30, a very tight window can result when amended T4’s are involved.

Special T4’s must also be properly planned … or planned, period. A “Special T4” is required if the employee contributed to the Canada Pension Plan (“CPP”) while resident in another country. At CompassGUIDES, we assist Canadian employers with social security reviews for international assignments, including obtaining the required approvals from tax authorities.

Advance planning, of course, can help to ensure that T4’s are accurate at first issue. Plan on consulting with your Canadian Tax Services provider (a) now, to ensure that the appropriate information is being gathered and withholdings are being made throughout 2007, and (b) again in January of 2008 to ensure that plans for preparation of the T4’s are on par.

2. Errors on Form T626: “Overseas Employment Tax Credit”

In our expatriate tax practice this past tax season we observed a number of cases where Form T626 Overseas Employment Tax Credit (“OETC”) was omitted or completed in error. This form must be included in any tax return that is claiming the OETC.

We also observed during the 2006 tax season that many employers issued Form T626 for persons who were actually ineligible for the OETC. It is important to avoid this situation, in order that the expatriate employee not falsely expect to receive this tax credit and have mentally spent a significant amount of cash that he was counting on pocketing.

OETC eligibility should be reviewed as part of initial international assignment planning, and ideally prior to preparing the employment agreement for the assignment, as the OETC often factors into compensation-setting. Eligibility for this tax credit involves compliance with numerous requirements, and at CompassGUIDES we assist employers with this review in order that they be able to provide a level of assurance of eligibility to their rotational expatriate employees.

3. Foreign Taxes Paid

Canadian corporations sending employees to international worksites should plan, plan plan – and the earlier the better. It is important to ensure that withholdings are being made from Canadian payroll, if necessary, to cover the remittance of foreign taxes on behalf of the expatriate employee.

Evidence of foreign taxes paid is required for preparation of Canadian tax returns in order to substantiate any foreign tax credits being claimed. At CompassTAX, our specialized expatriate tax professionals liaise, if necessary, with foreign employer offices to obtain the appropriate evidence of foreign taxes paid, or coordinate with Canadian payroll, to ensure that W2’s, for example, are properly issued.

Recommendations

Many of the observations noted here may have been the residual effects of the extreme workforce shortage in Calgary. With few hiring alternatives, Canadian employers may have been relying on inexperienced payroll staff for these responsibilities, or seasoned payroll staff may be dealing with excessive workloads.

With a view to the 2007 tax season, employers can consider obtaining consultant coaching for payroll staff to bring them up to speed on expatriate payroll details, and establish withholdings and procedures for T4 preparation. Another alternative is to consider outsourcing the expatriate payroll function.

In Summary

At CompassGUIDES, we assist Canadian employers with the planning of international assignments, to ensure that they are launched with an organized approach and with the least amount of stress for the assigned employee.

Our assignment planning approach is comprehensive and includes a distinct focus on Canadian tax compliance, as the absence of tax squabbles and assignee anxiety over Canadian tax matters are indicators of a successful assignment.

You can contact us at CompassGUIDES with assignment planning concerns at 403-531-2200.

 


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6