A popular trend that advertising agencies, startups, and other organizations have adopted (especially with the rise of COVID-19) are remote employees. Software-as-a-service (“SaaS”) tools have made working remotely seamless — to the point that some businesses run 100% remotely with no physical location.
Entrepreneurs and their fully remote offices commonly miss the legal implications of having employees scattered across the country or the world. If you’re physically present in an office in Ontario, you’re generally only dealing with Ontario and Canadian tax and labour laws. But once your UX designer is stationed in California, your software engineer is chilling in Hawaii, and payroll is coming from an Ontario business corporation, then you may have a serious tax issue on hand.
In this article, I focus on some of the possible tax issues a fully remote business may face. This article only provides general information. Every unique business faces unique tax issues. If anything in this article sounds relatable, I encourage you to find a tax professional, such as an accountant or tax lawyer.
Withholding Obligations of Canadian Employers
If an employee, who lives outside of Canada, earns income in Canada, then that income is generally taxable in Canada. This typically means you, as their employer, also have to withhold an amount of income tax when paying non-resident employees. You would then have to remit these taxes to the proper government by the appropriate due date. Tax treaties between your business’ country of residence and your non-resident employee’s country of residence can further complicate the situations. This can inevitably involve significant expenses with accountants and/or tax lawyers. Further, not complying with the tax laws of the appropriate jurisdictions can result in enormous fines.
Independent Contractors are Not Always the Answer
Due to these mounting tax obligations, some more savvy businesses recruit remote employees as “independent contractors”. But for tax purposes, an independent contractor isn’t an independent contractor just because the legal contract says they are. Canadian tax law has copious factors in determining whether a person working for a company is an employee or an independent contractor. Some of the factors include:
- How much control does the employer have over the individual?
- Does the individual usually have a certain degree of financial risk?
- Is the individual using their own equipment or the company’s equipment?
- How integral is the individual’s job to the employer’s business?
A laundry list of jurisprudence, Canada Revenue Agency (“CRA”) clarifications, and other resources have answered how these factors may play out in specific scenarios. More information on whether an individual is an employee or independent contractor can be found on the CRA website. If you want a better answer, you can also request that the CRA provide a ruling on your business’ situation.
Ultimately, hiring remote, non-resident employees means you (or your accountant/tax lawyer) will have more than one tax system to worry about — not to mention the tax treaties in between. Technology has allowed us to have a fully online office with employees across the world. But the question remains whether this is the most tax-efficient path to follow.
There are potential international tax issues as well, such as whether a remote employee's activities give rise to a permanent establishment of the Canadian employer. For some guidance, see
https://airshare.air-inc.com/guidance-from-oecd-on-the-global-covid-19-tax-responses