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Assignment USA: Sending Employees Cross-Border

CompassGUIDES - March 2006

By Diana Matwichuk, Assignment Planning Specialist

The flow of business between Canada and the United States has increased dramatically in recent years. Apart from the physical presence of border security and a mass of immigration paperwork requirements, the border has seemingly dissolved, and this has led to a somewhat laissez-faire attitude among employers sending assignees cross-border.

According to the Canadian Employee Relocation Council (CERC) 2005 Employee Relocation Policy Survey, “overall (cross-border) activity has increased since the 2003 Survey, and relocations to Canada were slightly higher overall”. Further, “companies give relatively little time to relocate an employee – over 80% of organizations will give less than two months notice of an impending move, and over one third will give only three to four weeks.”

However, the US still does fit the definition of “foreign country”, and assignments to the US should be planned with the same amount of fervor as for any other international destination. Canada and the US are two of the most complex and well-administered tax jurisdictions in the world, and thorough tax planning for cross-border assignments simply comes with the territory.

Reasons for Increases in Manpower Flow

The CERC Survey cites “increased business opportunities and expansion” as the predominant reason for increased volume of relocations between Canada and the US (55% of participating companies), followed by “merger/acquisition” (24%) and “other” (17%). For example, these factors and the effects of global warming are causing a trend among companies in the oil patch to transfer employees of cross-border subsidiaries between Canadian and US drilling locations. On a seasonal basis, employees are transferred to coordinate with soil conditions not conducive to drilling, which are caused by rises in temperature that are occurring increasingly earlier in the year.

Additionally, both Canada and the US are feeling the effects of the global talent war. Bright young stars are being scooped to work in foreign locations, and corporations are scrambling to staff the resultant vacant positions. Consequently, US multi-national employers have been turning to their Canadian counterparts for seconded manpower, and vice versa.

What Planning?

With such cozy transfer arrangements, it is easy to allow assignment planning to slide. This seemingly “internal” supply of manpower is often regarded as a simple matter of obtaining US work visas and medical insurance for the assignees, and getting them on a plane.

Thorough assignment planning isn’t deemed as necessary as when sending assignees to the Middle East, for example, due to the proximity of the assignment locations and the similarities between the cultures. For example, it is common for assignees to receive no assistance in the planning for and blending of their assignment taxation. Not surprisingly, this eventually catches up with the assignees, and ultimately their employers.

Potential Repercussions

It is important to remember that corporations conducting business cross-border actually have four business partners: the cross-border clients, the assignees, the IRS and the CRA.

If the needs of any of these parties are not met, then problems arise. Often, assignment tax issues rear their head by way of the assignees, who receive surprise notice from the CRA or IRS of previously unexplained tax obligations. This sends the employer into a tailspin, frantically trying to sort out assignment tax issues for their assignees.

Tax issues, however, are not the sole source of post-departure assignment headaches. Misunderstandings and exposures related to the lack of contractual agreements, insurance and attention to payroll details can bring about the need for a frenzied back-pedaling of effort, in order to right what should have been handled in the planning stages.

Cross-Border Assignment Planning - Immigration

US Visa compliance comes to mind initially when corporations contemplate a cross-border assignment, however even immigration issues can trip companies up. According to Christine Caddel of VRV Immigration Services in Calgary, “delineation between the different types of work visas required for a US assignment is very grey, and prompts the need for an awareness of immigration rules.” Visa applications are not a simple matter, and they take time. There is often a misconception that, because of NAFTA, workers can come and go as they please, but as Christine points out, when this doesn’t happen, assignment costs can soar as drilling (for example) is held up by workers who were not allowed across the border.

Cross-Border Assignment Planning - Insurance

Corporations also need to ensure that adequate insurance is in place for the highly litigious and medically-expensive culture of the US. Jeff Simpson, of Calgary-based Simpson Group Insurance Services Inc., suggests at least $1million coverage, despite the fact that a number of plans offer coverage levels starting as low as $50,000. Based on soaring medical inflation in the US, individual claims costs have been known to near the $1million mark.

Jeff also comments that while corporations are generally very careful about ensuring adequate medical insurance is in place for their assignees to the US, individuals are often unaware of the importance of securing such coverage. This can pose a problem for decentralized corporations where contractors, or even individual employees, arrange for their own travel to the US (see January 2006 CompassPOINTS article, Under the Radar: When Employees Work Overseas Undetected ).

Contractual Issues

It should also be ensured that the appropriate employment agreements and primary contracts are in place, as these protect against employee dissatisfaction and potential litigation, particularly in the US. Employment agreements should ideally address the cancellation of insurance coverage, should an assignee terminate employment.

Proof of contracts and agreements are also required as part of applications for a number of Canadian and US tax credits. Corporations sending assignees to the US in a consultant capacity should consider establishing a Taxation and Accounting Protocol to identify and assign key tax and accounting responsibilities among the parties involved.

Assignment Tax Programs

Of the companies participating in the CERC survey, 70% reported having a written tax policy for cross-border assignments, with a 56% emphasis on equalization. Tax savings for both the assignee and the employer can be attained through an assignment tax program, but the extent of those savings is largely dependent on the thoroughness of the planning.

Often, assignees to the US are eligible for tax credits which can be used to reduce their withholdings at source. Also of particular concern for US assignees is the ability to continue their contributions to the Canada Pension Plan (“CPP”). With the current state and cost of US Medicare and FICA, which are not nearly as attractive as CPP, it is essential that this be addressed prior to sending assignees cross-border.

Documentation of US Assignment Policy

Also factoring into the overall effectiveness of the assignment tax program is how well it is communicated to the assignees. In our experience, assignees are much less likely to become anxious over assignment issues if policy related to the assignment is clearly documented, preferably online. When answers to their questions are available and easily accessible, the image projected by the assignment and the corporation is one of being organized, efficient and taking care of assignee needs.

Our CompassGUIDES Online Assignment Guides present companies’ assignment documentation via secure gateways on the web, so that policy and contact information can be accessed by assignees anywhere in the world. Changes to that policy are much more easily rolled out to assignees with an online vehicle than in paper copy.

Summary

At CompassGUIDES ™ , we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.

In concert with this strategic assignment tax planning, we assist multi-national employers with their preparation and provision of assignment documentation, including the possibility of offering these guides online to employees anywhere in the world with internet access. Visit our International Assignment Planning Help Desk for more information about international assignment planning.

The author wishes to thank Peter Simpson, CA, Christine Caddel (VRV Immigration Services 403-269-2224, ccaddel@vrv.ca) and Jeff Simpson (Simpson Group Insurance Services Inc. 403-281-4403, jsimpson@simpson-group.com) for their contributions to this article .

 


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