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Inbound Workers: Staffing Solution, but Employer Beware

CompassGUIDES - October 2006

By Diana Matwichuk, Assignment Planning Specialist

Calgary ’s severe labour shortage is forcing many multi-national corporations doing business in Canada to search internationally for solutions to their staffing needs. It is becoming increasingly common for us at CompassTAX to receive calls regarding the tax implications and planning considerations for bringing in expertise from a foreign country.

According to the Calgary Economic Development’s June 2006 Labour Force Profile entitled The Changing Profile of Calgary’s Workforce, “Alberta Human Resources and Employment projects that Alberta’s growing economy will create close to 400,000 jobs in the next decade, but currently only about 300,000 new workers are expected to enter the labour market, leaving a shortfall that may be as high as 100,000 workers”.

While inbound staffing is a viable and positive solution, employers should carefully plan their employment and the immigration, tax and legal issues involved.

Immigration Issues

The determination of employment type is a critical first step in planning for an inbound assignment. In some cases, independent consultants and employees require different types of Canadian work permits, which could preclude a change of employment type at a later date.

For example, US citizens can qualify under NAFTA for work permits. Christine Caddel of VRV Immigration Services points out that in the NAFTA Professional category of work permits, both employee and independent consultant employment types are possible, but with the alternative Intracompany Transferee work permits, only employees qualify. In some cases, it therefore may not be possible for an inbound worker from the US, with a NAFTA Intracompany Transferee work permit, to change employment type from employee to independent consultant.

This may not be an issue in the case of non-US countries, but warrants investigation with Immigration Canada or an immigration service provider – prior to establishing the employment type under which the inbound worker will be brought to Canada.

Independent Consultant versus Employee

The Calgary workplace is typically abundant with independent consultants, and with so many non-salaried workers, it is very easy to mistakenly focus on this employment feature as the one which singly distinguishes independent consultants from employees. Unfamiliarity with the other differences often leads corporations to automatically hire inbound workers as independent workers, without consideration to the pitfalls of doing so, the tax obligations involved, or the alternatives.

The CRA has a very strict definition of independent consultants versus employee, and these criteria govern the type of tax obligations which are to be imposed on the workers and their employers. When considering the import of international talent, companies should carefully delineate between independent consultant and employee, consider all of the pros and cons of hiring on each basis, and determine the appropriate employment type for the inbound assignment.

Independent consultants normally cannot be bound to employment at a single company for a signifi cant length of time. However, for inbound and therefore Canadian work permit purposes, they must work only for the company that brought them into Canada. That being said, inbound independent consultants do not have the job security that goes with employee status, and cannot expect a severance if their employment is terminated.

Independent consultants generally supply their own tools or equipment, and arrange for their own benefits. The employer should not have much control over the manner in which the services of an independent consultant are performed, and expenses are usually included in the remuneration paid. By contrast, employees are directed by their employers, are paid a base salary over and above which benefits and expenses are paid, and are normally supplied all tools and equipment by the employer.

Employers should be cautious in decisions over whether to hire inbound workers on an independent consultant or employee basis, and pay particular attention to their documentation of such in employment agreements. Failure to do so can result in hefty penalties and interest levied by the CRA, for example, for being negligent in withholding the appropriate taxes.

Contractual Agreements

The introduction of Sarbanes Oxley requirements stepped up the onus on corporations to formalize and document all processes and relationships. Contracts and written employment agreements are in many cases scrutinized by the CRA to evaluate, for example, adherence to independent consultant and employee guidelines. In their haste to launch an assignment, it is not uncommon for corporations to neglect or pay only cursory attention to documentation and this can come back to haunt them financially, upon CRA audit or legal action from disgruntled workers.

At CompassGUIDES, we prepare, among many other type of agreements, Assignment Letters and Inbound Independent Consulting Agreements. We also document taxation and accounting protocol for clients, to mitigate the risk of misunderstandings between the parties. The following chart highlights how inbound worker documentation interrelates and affects internal processes.

Cultural Issues

It should also be noted that inbound workers are often accustomed to only a rudimentary tax system in their home country, if any at all, and from some locales, have an inbred fear of government officials. The extent of Canadian taxation can be overwhelming to these inbound assignees. Without adequate preparation, inbound workers may naively conduct business and handle their personal financial affairs as they did in their home country, which is likely much more informal than our highly-documented and litigious Canadian society.

Summary

While bringing foreign workers to Canada is a solution to staffing projects at home, employers should beware. It is important to plan, plan, plan and carefully consider whether these workers should be employed on an independent consultant or employee basis, and further, to thoroughly document the terms of the employment. In so doing, employers will have the assurance that the appropriate tax and payroll processes are being implemented for these individuals.

About Us

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.

In concert with this strategic assignment tax planning, at CompassGUIDES ™ 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 of CompassTAX (403-531-2000), and Christine Caddel of VRV Immigration Services (403-269-2224 or ccaddel@vrv.ca) 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