Looking Back at the 2004 Tax Season
CompassTAX - May 2005
By Diana Matwichuk, CompassGUIDES HelpDesk Coordinator
April 30 has been torn from your desk calendar. Another Canadian tax deadline has passed, and a number of burning questions are gnawing at you.
Did your assignees spend an inordinate amount of valuable company time trying to deal with and integrate their home and host country taxes? Did you spend hours trying to answer difficult assignee tax questions? Is it possible to make your assignments more attractive from a tax perspective to prospective assignees? Why are your assignments costing so much and what can be done to reduce those costs?
Retrospection is a natural process after a milestone has been attained. For assignment managers, ever concerned about both retaining key assignees and containing assignment costs, this evaluation of the company’s assignment tax program has a distinct bias.
Importance of Assignment Tax Self-Evaluation
Assignment tax programs are only as good as the amount of planning and maintenance devoted to them. Most assignment managers are keenly aware of this altruism. Unfortunately, far fewer actually put it into practice.
Reflection on the 2004 tax season is the perfect opportunity to derive improvements to assignment tax programs, and the timing is right for implementing those changes before 2005 assignment taxation begins.
A number of aspects of assignment taxation can cause overly high tax costs for assignees and the multi-national employer. Unplanned social security tax. Failure to apply and/or qualify for Overseas Employment Tax Credit (OETC). Inadequate integration of Canadian and host country taxation. The culprits are numerous, varied and begging to be caught.
Social Security Tax
For example, evaluation of social security tax on an assignment by assignment basis can yield significant savings because of the totalization agreements which exist between Canada and a number of different countries. These social security agreements allow for benefits coverage under one system while contributing under the other system.
Certain rules and exceptions are involved with these totalization agreements which, with advance planning, allow assignees to take advantage of additional savings. In some cases, decisions must be made prior to the start of an assignment for the social security tax savings to be maximized, and inclusion of this point in an assignment tax program is a reminder to start the individual evaluation process early.
Overseas Employment Tax Credit
Another example of a sometimes overlooked tax savings is the OETC, a credit which allows employees working abroad to shelter up to $80,000 from Canadian taxation. Employees who meet the eligibility guidelines must apply for the tax credit and have the application certified by their employer. Savvy employers will often include assignee application for OETC as a planning step in their assignment tax programs.
Integration of Canadian and Host Country Taxation
Many assignees are faced with taxation in two countries, and this can be a stumbling block to attracting talent for assignments. However, significant overall tax savings be achieved by blending taxation of the two countries. Adopting this integrated tax approach in assignment tax programs can make assignments more attractive to assignees through individual savings.
The Canada Revenue Agency (CRA) levies substantial penalties to corporations not withholding Canadian tax on the incomes of inbound foreign-based consultants. In many cases, the corporation is not even aware that this is required of them and the penalties come as a shock. Advance planning and internal corporate communication of policy for bringing foreign-based workers to Canada can produce savings.
For the international assignee, Canadian tax savings can also be gleaned by being declared non-resident. Unfortunately, this is currently not a simple task. The CRA has, of late, been rejecting seemingly watertight non-residency claims. Individual analysis of non-residency requirements is advisable for assignees, in order to take advantage of tax savings.
Evaluation now of the past tax season, and the inevitable improvements that are identified, will likely translate into changes to assignment tax policy. Perhaps even the development of an assignment tax program.
Since communication of these assignment tax changes will result in a waterfall effect in terms of assignee tax strategies, the earlier in the tax year that this can happen, the better. Assignees will have adequate time to apply for non-residency status and OETC. Inbound consultant withholding tax can also be sorted out promptly to avoid penalties to the company.
An assignee paying the minimal amount of Canadian and foreign tax is a happy assignee. An assignment manager with happy assignees and reduced assignment costs is also a satisfied person.
It pays to look back and reflect, in order to plan for the future.
At CompassTAX™, 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.
CompassTAX™ also offers clients with international assignees pre-departure and re-entry tax planning with a view to minimizing tax and providing experienced tax representation with the Canada Revenue Agency (CRA). CompassTAX™ specializes in all areas of cross-border taxation for consultants coming to Canada temporarily, Canadians moving back to Canada, and individuals living outside Canada with Canadian business ties.
The author wishes to thank Peter J. Simpson, C.A. for his contribution to this article.