Rotators vs In-Country Residents vs Short-Termers vs Consultants: The Risks of the One-Size-Fits-All Assignment Policy
CompassGUIDES - Nov 2005
By Diana Matwichuk, Assignment Planning Specialist
Assignees are often mistakenly lumped into a single, convenient international assignment policy. The result is an ill-fitting set of guidelines which leaves the assignee feeling frustrated and confused … and physically far away from the answers.
Rotators should be able to quickly look up in their assignment documentation, for example, exactly what provisions have been made to help them apply for Overseas Employment Tax Credit (OETC). On the other hand, this is not of interest to long term assignees, who might rather need a concise explanation of their company’s social security totalization policy with respect to CPP.
For this reason, at CompassGUIDES we implement Online International Assignment Guides for clients in such a way that the company can choose to present separate guides for each assignment type. Assignees anywhere in the world can access their own unique Online International Assignment Guide which outlines policy directly pertaining to their assignment type.
Words of Caution
For the past 15 years, Peter Simpson of CompassTAX has helped clients to sort through the tax complexities of different assignment types. “Multi-national corporations that don’t develop appropriate assignment policy to match assignment type, and therefore optimally blend with host country taxation and available tax credits, often find themselves with inflated assignment costs, and disgruntled assignees who are wondering why they can’t take advantage of tax savings”. Peter advises multi-national corporations on the development of Assignment Tax Programs (ATP’s) in order to avoid penalties and reduce overall assignment costs.
Of course, all of this assumes that the appropriate assignment type has been chosen in the first place. Workforce planners such as Calgary-based veteran in the field, Lynda Costello, caution employers to carefully plan how international assignments will be staffed. In their haste to launch projects overseas, Lynda observes for example that companies in start-up phase often opt for the “easy” route of sending people to work as consultants, whereas a step back to strategically plan the workforce composition can significantly reduce the occurrence of income tax problems.
In some cases, the choice of assignment type is obvious and the development of suitable assignment policy is the challenge, as Peter points out. In other cases, workforce planning is necessary to determine the most suitable assignment type, based on a number of factors including a review of assignment tax.
Rotators are considered to be Canadian residents by virtue of the fact that they have, at the very least, a dwelling, and often a family, to come home to on their “off-time”. Despite being taxed in Canada on their worldwide income, rotator assignments are very attractive to employees since they often offer a higher rate of pay than could be achieved in Canada due to the hardship and security allowances incorporated into compensation.
As Canadian factual residents, rotators are often eligible for the OETC. This must be carefully planned, however, to ensure that all requirements are fulfilled and the credit ultimately granted. While this tax credit potentially offers significant benefits that can be shared between the assignee and the employer, the OETC should not be promised to potential assignees without consultation from a tax service provider, as the Canada Revenue Agency (CRA) carefully scrutinizes applications.
Multi-national employers sending employees cross-border or overseas on rotational assignment should have an ATP which addresses their particular tax issues and provides for individual pre-departure tax counseling. This is especially important for those traveling to the US and other countries in which their income will be taxed. Withholding tax should not come as a surprise to assignees, and it should be planned for by the employer well in advance, in order that payroll procedures be implemented accurately and on time. Sizable penalties are levied by both the Canadian and US governments to employers not properly withholding tax.
There are definite benefits for employees on long term assignments cross-border or overseas. Provided that they sever all ties to Canada and in so doing become non-resident, long-term assignees can, in some countries where there is no taxation, earn a tax-free income.
The CRA has recently been taking a hard line position on Canadian non-residency however, and granting of such is not always a certainty. To ensure that assignees are not unpleasantly surprised with a negation of their claim of Canadian non-residency, and as a result find that their worldwide income is taxable in Canada, we generally include standard non-residency reviews for individual assignees as part of ATPs and pre-departure tax counseling.
Short term assignees often have the most difficult decision regarding residency, and therefore especially benefit from a clear and concise ATP which outlines the pros and cons of both sides, and how the company will assist them. Many short-term assignees do not want to relinquish their spot in the North American housing and vacation property markets, or are not able to take their families with them to obscure or unsafe work locations. By keeping their residential ties, they choose a status of factual Canadian resident.
Social security tax issues are a complex matter, and companies without clearly documented assignment policy often discover that their assignees are investigating the ins and outs on valuable company time. We advise our clients to proactively develop an assignment tax policy which addresses all tax issues and to document this policy in such a way that answers are immediately available to assignees.
Multi-national employers sending Canadian resident employees on long-term assignments can apply for a Certificate of Coverage to encompass all of these assignees and allow them and the company to take advantage of significant savings. This is especially applicable for assignments to the US or some European countries, where social security costs are much higher than in Canada. Since the company is matching the assignee’s social security contributions, any savings that can be gleaned through totalization also directly decrease the overall cost of the assignment. We incorporate the application for Certificates of Coverage, where suitable, into overall ATPs for our clients.
Other short term assignees prefer to waive these benefits in favour of becoming non-residents eligible for tax-free income in another country, where that privilege exists.
Assignees who choose to rent out their house while overseas, as is often the case with short term assignments, may decide to sell their property during the assignment term. ATPs should cover this possibility with provisions pertaining to Clearance Certificates, which must be obtained from the CRA within 10 days of the closing of a house in order to avoid penalty. At CompassTAX, we often hear from assignees in far away places that they were not informed of this requirement and there is a mad scramble to meet the requirement.
Consultant assignees are exempt from the benefits side of assignment documentation, however there are many tax implications of an international assignment for the company and the consultant. Consulting contracts should clearly outline who is responsible for the payment of host country income or withholding tax. This is especially important when the consultant has, or is deemed to have by the tax authorities, a place of business in the host country.
Assignment tax policies should reflect these differences, and at CompassTAX we often advise clients on those differences so that they can be documented, or decisions made to alter assignment type. In Part 2 of our series, Lynda Costello will write about the workforce planning issues related to the selection of assignment type.
US taxation is equally complex as Canadian tax, and ATPs for US/Canadian cross-border assignments should clearly lay out how the taxation will be optimally blended for the assignee. Decisions regarding assignment tax policy made early in the planning process can result in significant tax savings for the assignees and the company.
When preparing assignment documentation for clients’ US assignments, we regularly include provisions for US immigration issues, social security numbers and taxpayer identification numbers. What could be an overwhelming exercise for assignees to the US, becomes a clear and organized set of procedures with this documentation, as their ATPs lay out what information they must provide to allow us to apply for their necessary taxpayer identification numbers and organize their taxation.
At CompassGUIDES, we help multi-national employers to evaluate the tax issues which will affect their assignees and develop applicable assignment tax solutions as part of an ATP unique to the assignment type. Estrega International helps clients to optimally plan their assignment workforce. Subsequent to these planning stages, CompassGUIDES provides online web-based assignment documentation which is easily accessible anywhere in the world by the company and assignee.
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 or answers to your assignment planning questions.
The author wishes to thank Lynda Costello of Estrega International, and Peter Simpson, C.A. of CompassTAX for their contributions to this article . Lynda can be contacted at (403) 616-8730 . Peter can be contacted at (403) 531-2200 .