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Angeline Chandra:
Welcome to BDO Canada's Cross-border Tax podcast series. My name is Angeline Chandra, and I am the National Leader for Transfer Pricing Services. This is the first of two episodes focusing on the considerations of cross-border tax during COVID-19. The COVID-19 pandemic has resulted in considerable economic and financial stress for governments in almost every country. In Canada, the government has implemented various economic stimulus packages to assist individuals and businesses with navigating through these challenging times and to maintain financial stability as much as possible. Support for individual and families include the Employment Insurance Program, Canada Emergency Response Benefit and mortgage payment deferrals. Support for businesses include the Canada Emergency Wage Subsidy, business loans, work-sharing programs, creation of new jobs and opportunities for youth, and extension of layoff periods. The U.S has experienced similar issues in their economy. The pandemic has pushed the U.S. federal budget deficit above $3 trillion during 2020, which is almost triple the deficit of the previous year.
The staggering deficit was spurred by a massive increase in government spending to battle the economic fallout from the pandemic. In order to survive these difficult economic times, business owners will need to closely monitor their cash flow and to run their businesses as efficiently as possible. In this series of two podcasts on COVID-19, we will discuss ideas and methods that companies can use to maintain financial security and efficient business operations.
Today, I would like to introduce our speakers, Laura Ball, International Tax Partner, Joanne Sun Partner for Expatriate Tax Services and Immigration Services Leader Kareen Tea Senior Manager for US Corporate Tax. Laura, can we start a discussion with your thoughts on Canada's response to COVID-19?
Canada’s Response to COVID-19
Laura Ball:
Angeline, thank you for the warm introduction. Of course. So to put it lightly, Canada has created quite an ambitious economic response plan when compared to other G7 and G20 countries. For example, fairly unique to Canada is that it has a program to provide commercial rent assistance to businesses. Canada has also doubled down, enhancing both unemployment benefits provided directly to Canadians as well as wage subsidies to businesses to keep people employed. So those are just a couple examples of how our response has differed when compared to some of our peer countries.
Angeline Chandra:
Laura, in your mind, what program has had the biggest impact on Canadian businesses?
Laura Ball:
By far, the Canada Emergency Wage Subsidy also known as the CEWS or the CEWS, both Canadian controlled and foreign controlled companies operating in Canada are indeed eligible for the CEWS claim, provided that they satisfy the program requirements. So namely, they are employing Canadians and have experienced a decline in revenue. But unlike a lot of other countries that have offered the wage subsidies, Canada is actually one of the few that subsidizes the wages of active employees. And so this has resulted in some real significant dollars being deployed by the Canadian government to businesses.
Angeline Chandra:
And what is the value of this wage subsidy?
Laura Ball:
That's a great question, roughly $734 to $847 per person, per claim period, which may not seem like a lot on first blush but if you have about 30 employees, that's over a hundred thousand dollars per month, which is significant, especially when companies are employing hundreds of people. And as of today's date, businesses still have time to make a claim for seven periods beginning September 2020 so we expect to see some significant dollars being deployed in the coming months as well.
Angeline Chandra:
Laura, can you also tell us about the new rent subsidy?
Laura Ball:
Yes. So a couple big things to understand with the new rent subsidy, it's currently open until mid 2021. Any sized business will qualify for the subsidy and it's got very similar eligibility criteria as what we've seen for the CEWS in that you need to have experienced a revenue decline. And I should point out here that the name is a bit misleading and that expenses related to the ownership of a building as well as a rental expense will qualify for this subsidy.
Angeline Chandra:
And what is the value of the rent subsidy?
Laura Ball:
It's another biggie. The rent subsidy, max subsidy is 90% of qualifying expenditures. So companies are looking at getting about $75,000 per period or per month. And they've capped that at $300,000 per month when you have a group of affiliated entities.
Angeline Chandra:
Laura, is there anything else multinationals can do to help with their cash crunch?
Laura Ball:
Yeah. Another great question. So multinationals, we're seeing an uptick in them looking internally to shift cash where they may need it the most and oftentimes in our client base that cash is required by the Canadian parent. So Angeline, one of the key benefits of the Canadian foreign affiliate regime is that dividends can be repatriated to Canada free of Canadian tax. So this tax-free treatment, it really hinges on a number of factors. And one of which is that the foreign affiliate is resident in a treaty country. So residency for this purpose, it's common law residency, and it's heavily fact dependent. In other words, where the central management and control is happening, these are things like where the majority of directors reside, where the board meetings are taking place and where those real strategic decisions are being made and exercised.
And so you know we have best practices and these best practices that companies typically adhere to realistically just may not be possible in the face of various COVID-19 travel related restrictions. So I just encourage companies and advise companies to really step back and look at whether displaced employees or directors create a tax risk before they decide to repatriate cash to Canada.
Angeline Chandra:
You raise a very interesting point on travel restrictions. Joanne, we know the Canadian borders are closed, but reports show that some 8.6 million people entered Canada during the pandemic. So my question to you is, are the borders really closed?
Travel Restrictions/Global Mobility
Joanne Sun:
Well, Angeline, our Canadian borders are not entirely closed because they do allow for Canadians to return, as well as for the entry of essential workers among other groups. So while we're seeing most travel activity in the essential services sector, we're also seeing that the term essential is a fairly subjective test and CVSA officers have quite a lot of discretion as to who gets to enter the country and who's going to be turned back.
Angeline Chandra:
Based on your discussions with business leaders in Canada, what are some of their biggest challenges in global mobility during the pandemic?
Joanne Sun:
Well, you can imagine the chaos that companies are going through today in trying to get their workers safely to the right place, at the right time, at the right cost to meet the needs of the business and not just to get them there, but then to get them back home safely to their families. Before COVID, it was complicated enough. We had employees who would need to get business unit approval, finance, HR, tax, and immigration approvals prior to travel. But now they also need to weigh in travel and security factors such as flight cancellations, we've got border closures, testing, quarantine and isolation requirements, and just general delays in Visa applications in many countries. And two other big challenges that companies are struggling with today are the tracking. The whereabouts of their workers, because their time spent in different jurisdictions could inadvertently trigger tax consequences. And second of all, also just keeping up with those ever-changing tax and immigration and travel rules.
Angeline Chandra:
I can certainly understand how businesses are unclear about what their employees can and cannot do. New rules and measures are being announced weekly and sometimes daily. It must be tough for global mobility managers to keep on top of it all.
Joanne Sun:
Oh, for sure. I agree. And it's certainly been tough Angeline and perhaps I should just mention that fortunately, there are some really good digital tools out there that can help employees or companies track wherever the employees are going to be around the world. And one of these is BDO QuickTrip. It's essentially a mobile app and it not only tracks the whereabouts of the employees, but also alerts the companies to the latest potential tax and immigration, travel and security issues in each country. It really helps the company manage the risks relating to their globally mobile workforce.
Angeline Chandra:
During COVID, displaced workers seem to be the trending topic in global mobility. Can you share your insights on this Joanne?
Displaced Workers
Joanne Sun:
Sure. When it comes to displaced workers, everyone has their own stories to tell. Some workers were repatriated back home to their home countries to continue to work. And others came to Canada to wait it out since maybe they had family or loved ones here. And we also saw workers, other workers who are less stranded in different jurisdictions. And each of these stories have very practical challenges. And for both the companies and the employees alike, from both a tax and immigration perspective. So for example, let's look at some of the tax issues. So the top concern when it comes to displaced workers is permanent establishment as it can inadvertently create a taxable presence for the company and the jurisdiction. So Laura, maybe you can weigh in on this.
Laura Ball:
Yeah, of course. With respect to displaced employees, the risk of a sales type agency PE, or a service PE, they're greatly increased. But the CRA recently followed guidance that was issued by the OECD. And they did provide some welcome relief from consequences that would otherwise result if there was a strict compliance with the rules as written. So this administrative relief, it really hinges on the fact that a prolonged presence in Canada or the conclusion of contracts while a foreign employee is in Canada, may not necessarily give rise to a PE, provided these activities are not prolonged and took place during periods in which travel restrictions were in place. Kareen was similar guidance issued in the U.S?
Kareen Tea:
Yes, Laura. On the U.S. side, a displaced employee of a foreign country can accidentally create PE in the U.S. as well. The IRS has provided some relief around this hinged on specific facts and conditions that needs to be reviewed on a case-by-case basis. And similarly on the state level nexus or taxable presence could accidentally be created in a state. For example, if employees are working from home in one state, away from the state where their business offices are located, nexus or taxable presence could be created, which could potentially trigger a corporate tax filing requirement in that state, or even seek payroll filing obligations.
Angeline Chandra:
So Laura, displaced directors can also impact corporate residency as well, right?
Laura Ball:
Yes. For example, if a Canadian company is managed and controlled abroad because of a displaced director, then there may be concerns that the corporation is no longer considered resident of Canada for tax purposes and that carries with it a number of consequences. And similar to corporate residency issues, there are some personal residency issues for employees as well, right Joanne?
Joanne Sun:
Definitely Laura. Extended stays could give rise to unexpected tax residency and even income taxation in those jurisdictions. And what a lot of people don't know are the social security challenges as well. If not handled correctly, the employer could be required to register and pay social security contributions in the country where the employee displaced and in some cases it can even result in double social security taxes in multiple countries, or potentially leave the employee not covered in any country. And this could really affect their future access to benefits. So back to your original question, Angeline, as you can see, displaced workers can create a number of tax issues. And also many countries have issued some temporary administrative relief. What we have to remember is that the relief isn't binding, it's only temporary. It doesn't cover all of the circumstances. And in fact, they don't even apply, I mean, they only apply in very limited circumstances. So companies will need to work closely with our tax advisors to avoid any unexpected surprises.
Angeline Chandra:
Joanne, it seems like there might be considerable immigration risks as well. Can you provide us with your thoughts on this?
Joanne Sun:
Absolutely Angeline. Displaced workers can certainly pose an immigration risk. For example, some workers may have unknowingly overstayed or contravened a condition of their state, and these actions can lead to penalties or sometimes flags on their immigration history. And in severe cases, it might even result in companies being barred from bringing more foreign workers in in the future. But fortunately, many companies or countries actually have put in place a number of common-sense policies to release some of the unintentional noncompliance during the pandemic.
Angeline Chandra:
Joanne, if you can give us your best guess, what do you think global mobility will look like, post pandemic?
Joanne Sun:
Global mobility is changing at such a fast pace and right now, as companies are planning of the eventual return of employees to offices, they're also looking at offering more flexible working policies, and there are so many benefits to this. Not only can it help improve employee engagement and retention and mental health, it can also help gain access to global talent pools and fill skills gaps. I mean, we were seeing before COVID, there was a talent shortage for skilled workers in so many sectors and companies were struggling to fill positions. So some companies are now actively looking at hiring international workers or they're adopting hybrid work from home models, they're considering virtual assignments and work from anywhere policies. And while there are so many exciting ideas to explore, it's equally important to note that it's not that simple to implement. It sounds great in principle, right? But there are some tips and traps to watch for, and as these trends evolve, we're certainly going to be seeing a lot more tax and immigration, HR mobility, legal, technology as well and regulatory challenges. So all stakeholders will really need to work together to navigate the curves ahead.
Angeline Chandra:
Speaking of navigating the curves ahead, Kareen, the U.S. economy is heavily depressed by the pandemic. What has been the us response to COVID-19 and what types of relief packages are available to struggling businesses in the U.S?
U.S. Response to COVID-19
Kareen Tea:
Thanks Angeline. On the U.S. side, in response to the economy crisis, former president Trump signed an emergency relief package last December aimed at providing extra cash to struggling small businesses to help them mitigate and weather the storm. So this package contains a second round of Paycheck Protection Program known as PPP loan that are in essence forgivable loans if used by businesses to cover for their operating expenses. And the Bill also contains several important changes and clarification to the initial PPP loan. And one of these changes is to expend the non-payroll costs that are eligible for the loan forgiveness and by doing so, enabling more businesses to get full forgiveness on the loan.
Now another change similar to the Canadian provision is that the taxpayer will need to experience a decline in revenue in order to be eligible for the second round, if all other requirements are met. And lastly, subject to much contentions during this last couple of months is the deductibility of expenses related to a PPP loan. So the Bill confirms that the business expense paid out of the PPP are deductible for federal income tax purposes.
Angeline Chandra:
Kareen, are there other payroll incentives that are part of the Stimulus Bill and can actually help business with their cashflow?
Joanne Sun:
Yes, Angeline, the Bill also contains significant enhancement and improvement to the Employee Retention Credit, also known as the ERC. This is a refundable payroll tax credit. And one of the improvement is to increase the rate of the credit from 50% to 70% of qualified wages. This in terms translate in an increase of the parallel credit to $7,000 per employee, per quarter and this is applicable for the first two quarters of 2021, whereas in 2020, the maximum payroll credit allowed was a $5,000 per employee, for the whole year.
Angeline Chandra:
Kareen. Can you also discuss the interplay between the ERC and PPP loan?
Kareen Tea:
Yes Angeline. Previously the PPP and the ERC were mutually exclusive, and taxpayer can only take advantage of one of the other of these provisions. Now, the Bill allows taxpayer to take advantage of both measures retroactively. And this is generating additional cashflow opportunities for taxpayers. For example, if an employer that receive a PPP loan, and that was previously prohibited from claiming the ERC may now do so and this is retroactively for 2020. The only caveat here is that a taxpayer cannot double dip. Wages used for PPP cannot be used simultaneously for the ERC.
Now another interesting interplay between the PPP and the ERC is to allocate the maximum permissible amount of non-parallel costs that now have been expended by the bill to get full forgiveness on the loan instead of using these parallel expenses for the loan forgiveness that could otherwise be used for the ERC. For borrowers that have already submitted their application, and this is the case of a lot of our clients, we are waiting procedural guidance for addressing this widespread issue, because at this time, there is no possibility to amend these applications under current statute. But the upshot here is that there are many intricacies for maximizing both provision, and we strongly suggest you contact your U.S. video advisor.
Angeline Chandra:
Kareen, given the current environment, what are your thoughts regarding the potential increase of corporate income tax rates and the timing of these rate increases?
Kareen Tea:
This is a great question, Angeline, and a question that's been on everyone's mind now, especially that the Democrats have a slim majority in the house and the Senate. The Biden administration has proposed a corporate rate increase from 21% to 28%. So this is a seven-point increase in the rate itself that will likely trigger changes elsewhere in the tax code, more specifically affecting the GILTI and FDII provisions, both of which are tied to the corporate income tax rate. There's also been discussion and concern during the campaign of increase retroactively back to the beginning of this calendar year, but that appears to be off the table. The Biden administration has said that the corporate rate increase will be part of a large spending investment package, but not now, while the pandemic is depressing the economy. So figuring out the effective date might be further down the road.
Angeline Chandra:
Well, we certainly have interesting times ahead and both businesses and individuals are wondering what the impact of these rate increases will be.
Based on our discussion today with Laura, Joanne and Kareen, I heard several key takeaways that taxpayers should keep in mind. Laura mentioned that companies should be mindful of legislative changes to ensure they're getting the assistance they need to weather the storm. Multinational organizations can also look internally to shift and repatriate cash where they need it most, but this shouldn't be done without considering the tax implications of such transactions, particularly where they involve displaced employees. Next, Joanne mentioned that as companies are planning the future of the workforce, including hybrid remote work models and virtual assignments, it will be interesting to see how governments around the globe will react to these arrangements longer term. Companies will need to be aware of the corporate tax, payroll, employee tax, and immigration issues to help them make informed decisions.
And finally, Kareen mentioned with President Biden in office, the U.S. legislative path can gear towards weathering the storm of a depressed economy. The new administration will eagerly try to enact additional generous stimulus packages to provide immediate relief to small and mid-sized businesses. Taxpayers should seek to take advantage of these provisions in the shorter term while large scale tax changes, particularly any potential tax increases may not go into effect until next year at the earliest. Tune into part two of this podcast where we will hear from Therese Garcia and Bruce Goudy on transfer pricing and indirect tax matters relating to how COVID-19 has impacted the transfer pricing of goods to its related parties across the border. Contact us if you would like to speak with any of us about the topics discussed on today's episode and follow our podcast series on cross-border tax.
Thanks and have a great day.
The information in this publication is current as of February 12, 2021.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
