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Ka-ching, Ka-ching at the CRA: Ensuring Tax Balance in the Trend to Short Term Assignments

CompassPOINTS - September 2007

By Diana Matwichuk, Manager Assignment Planning Services

Recent trends have seen assignment managers planning more short term assignments.  The Canadian Employee Relocation Council (CERC) 2007 Employee Relocation Policy Survey reports that 32 of 51 responding corporations have short term international assignees, and that “56% of those companies expect an increase in volume in the coming year”.  Short term assignments are normally defined as those arrangements which are less than twelve months in Alberta.

Short term positions are often easier to fill, and they are considered less stressful on the assignee and family than a long term international move.   Employees are busy, their families are busy, and accommodations are increasingly more difficult to find.  Savings to overall assignment costs can be gleaned from avoiding the all-too-expensive long term international relocation.  It seems like the perfect solution, and perhaps it is in certain cases.

But what about the tax implications?  Has assignment taxation been factored into the early stages of assignment planning?  Not just as a knee-jerk reaction at tax return preparation time?  The CERC 2007 Employee Relocation Policy Survey also reports that “the most common challenge is tracking short-term assignments for tax purposes”.  Proper assignment tax planning can significantly reduce overall assignment costs, and just as importantly, lack of it can sometimes nullify the savings from a shift to shorter term assignments.

Assignment Letter and Relocation Policies

It is important, with any type of assignment, that the assignment letter and relocation policies fit the nature and term of the assignment.  Short term relocation policies in particular differ from other assignment types since the assignee’s family does not normally join them in the host country.  These would normally include assistance from a relocation service provider.

Deborah Francis of NuPAD Solutions Canada, which offers a wide variety of relocation services to international assignees, explains that their destination counseling usually includes a tour of the host city, assistance with obtaining local taxpayer identification numbers, assistance in opening a bank account and driver’s license, and pick-up at the airport.  According to Deborah, the objective of short term assignment assistance is to ensure that “the disruption is minimized for all parties”.

Taxation of World-Wide Income

Canadian tax residents are taxable in Canada on their worldwide income.  This is significant for short term assignments, as the income that the assignee earns abroad is taxable in Canada.  If the host country for the assignment has personal taxation, then foreign tax credits can generally be claimed to offset the tax paid overseas.  However, if there is no taxation in the host country, then that income earned abroad by the assignee is fully taxable in Canada. 

Canadian Tax Residency

Long term assignees can avoid this Canadian tax grab by becoming tax non-resident of Canada.  A whole set of requirements must be met in order to qualify for this status, and those on short term assignments normally do not qualify.  It is necessary to sever most residential ties to Canada, and this contradicts the purpose of the short term assignment.  Available tax credits may significantly reduce Canadian tax.

Travel Stress and Taxes

Travel back and forth from the host country to Canada to reunite with family can be stressful for the assignee.  Tax worries are just one more item that you don’t want to serve up on the assignee’s platter.  A planned and documented approach to assignment tax, including the offer of assignment tax counseling, can significantly reduce the assignee’s anxiety levels.  This translates into more effectively worked time on the job.

A Planned Approach

It is not uncommon in our expatriate tax practice to receive the frantic phone call from a new client with an all-too-familiar assignment story.  “I was given 8 hrs to get to the airport and on the plane to …. Norway, so I didn’t even have time to think about taxes.  I’ve already filed my Canadian income tax return and now I found out that I have to pay Norwegian taxes as well.  How does that affect me?”   By this time, the assignee may actually be on another short term assignment in …. France, with a whole new set of tax consequences.

Had the company adopted a planned approach, the assignee would have likely been given departure tax counseling to ensure that all of the necessary forms and tax returns were obtained or prepared, at the appropriate time to avoid penalties and reduce professional costs.  The employee knows what to expect, and does not have to waste valuable company time fretting about assignment tax.

Employer Responsibilities

Canadian corporation sending employees on short term international assignments should be aware of their responsibilities in the host country.  These will normally include the withholding, remitting and reporting of tax to the local tax authorities, and ensuring that host country tax returns are prepared for the assignees.

In Summary

Employers and their expatriate employees do not like surprises, especially from the CRA.  Our mission at CompassGUIDES is to help companies roll out planned assignments which are positive experiences for their assigned workers and their families.  We encourage corporations to provide their expatriate employees with an Assignment Tax Program that covers all of these details and helps them to approach their assignment from a planned tax perspective, so that CRA penalties need not be an issue.

For more information about international assignment planning and the publications and services which CompassGUIDES offers to multi-national employers, visit our website at www.compassguides.ca.

Thanks to Deborah Francis of NuPAD Solutions Canada and Peter J. Simpson, C.A. for their contributions to this article.

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