Episode 05: Employee
matters and the cross-
border tax issues

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CROSS-BORDER TAX PODCAST SERIES

Tax, immigration, and HR issues can be complicated when dealing with cross-border employees. What are the federal and state income tax exposures, and how do you ensure a smooth process at all levels of the organization? In mobility situations, who should quarterback the project and balance the needs of both the organization and employee? BDO Tax Partner Debra Moses is joined by tax professionals Daren Raoux, Jay Park, and Kevin Macnab to unravel these complex issues.

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Debra Moses:
Welcome to our Cross-Border Employee Podcast. Dealing with cross-border employees brings with it many tax, immigration, as well as HR issues that need to be identified. And the companies would ensure that they have looked at how they will deal with each issue. Employee matters are what can create many issues for your company, as well as the employee, if not properly planned. With us today, Daren Raoux will be discussing the expatriate and immigration issues. We have Jay Park, who will be discussing U.S. citizens moving on their own into Canada, and Kevin Macnab, who will be discussing our U.S. corporate tax issues that come along with having cross-border employees.

So Daren, can you provide us with some highlights on areas to be dealt with for cross-border employee?

Expatriate and Immigration Issues
Daren Raoux:
Sure, Debra. So I think, obviously Debra, I think it's important our listeners understand that often times a company that undertakes a project in another jurisdiction obviously brings along with it a lot of complexity. And as you kind of laid out, a whole layer of issues to be dealt with both at the organizational level, the finance level, at the employee level, and then obviously, you’re looking at both sides of the jurisdiction, whether you're looking at Canada or say, if I say, for example, in the host country, which might be the United States. And so I think as a starting point to a lot of such cross-border projects, it's important to bring all of the team members together, both internally with your organization, as well as the stakeholders outside to start planning out this employee mobility transfer, whether it be on a short-term basis or a long-term relocation, so that you can kind of take all the steps upfront to make sure it's a smooth process along the way.

Debra Moses:
So how important is it when you have companies and they have their employees traveling to track them and where they are?

Daren Raoux:
Well, I think, and I think my colleague, Kevin, will attest to it, the tracking of employee data and location information is critical to many aspects of sort of the, I would say, the compliance process for both the organization and the employee. So for example, in my area of specialty, dealing with employees, it's important to understand how much time an employee is spending in both the home country and the host location, particularly so that we can have an understanding of what the potential implications are for things like residency, taxation of that individual employee in the host location. I think, Kevin, is it fair to say, if I can ask off the top, such employee data is important probably for PE and nexus issues. I don't know if you want to weigh in for a few minutes on that.

Kevin Mcnab:
Yeah. I mean, I think that's certainly going to be a key factor when it comes to doing the analysis from a corporate perspective because the second you've got a Canadian company that's sending employees down to the U.S. or hiring people in the U.S., that can potentially open up Pandora's box in terms of where you might need to file, what your exposures might be. And so it's very critical, especially early on when companies are really trying to understand what their federal and state income tax exposures are, to have that data available to them, so that we can, then come in and assist our clients with making those determinations. If we don't have the proper information available to us, it makes our job a lot harder. And so keeping track of that really will ensure that the process goes smoothly, such a point in time that we need to start having those conversations.

Daren Raoux:
Right.

Debra Moses:
So it sounds a bit complicated. I mean, Daren, what can an employer do to simplify something like that?

Daren Raoux:
Well, I think, and I think Kevin would agree, and I think all of us would agree on this, in our discussion that it's so important to take those preliminary planning steps up front. We all have these horror stories of we get called in after the fact where a customer has gone or a client has rushed into a certain, call it, an organizational structure to carry on business in another jurisdiction. And that has kind of a ripple on effect in all areas of the employee taxation implications, how we're going to manage things like payroll, employer of record. What does that mean for finance and corporate tax? And so I think early on, if we can get everybody to sit down and really look at the big picture, what makes the most sense for this particular project because some structures may make sense on project A, maybe on a long-term project basis may be very different for project B. And I think it's sometimes you just got to stick a step back, I think, first and get things organized properly before you start rushing down a path to getting everything organized, so to speak.

Debra Moses:
Thanks. That's great. Who normally, in a situation like this, would be dealing with the cross-border employees within the company? Who should lead it?

Daren Raoux:
I would call that the big trick question because I think inevitably it's kind of like the hot potato. I think you and I have had lots of experience where mobility management issues are often at the feet of HR, but HR is usually not the group that's often equipped to think through and really deal with perhaps the corporate issues, like bring in corporate tax function, to bring in the finance department that might involve a transfer pricing decision on, "Well, we have these employees where we're going to send their costs from an overall perspective?"

So I think, to some extent, maybe what you need to do is designate an organization or a subdivision that will be the quarterback, so to speak, for the project. And maybe it is HR, but make sure that both the tax function, the immigration function, and the finance team all know what's going on, so together they can kind of make, call it, a joint decision so that the project runs smoothly and we don't run a foul, perhaps, on international corporate issue that might get Kevin's team involved, perhaps, more proactive than it needs to be.

Kevin Mcnab:
Yeah. And I mean, I think certainly the situation that we often run into is a lot of our clients aren't familiar with doing business in the US. So there is a bit of an education and kind of training element to what we do at least in the initial stages because even if we are working with the finance and accounting team, there's a good chance that they're unfamiliar with the federal and state tax regimes in the US and they can be quite complicated. So part of that, too, is not necessarily having to find the specific person that has that preexisting knowledge, but just finding the right people that we can talk to teach them a little bit more about what the exposures are and kind of work with them to come up with a game plan on how to tackle it.

Daren Raoux:
And I think, Debra, just to go back to your point and bringing in, loop back in Kevin, I think a lot of times, an organization may get so focused on achieving a corporate tax objective, perhaps, that they kind of forget about the implications for the individual employee, for example. And obviously, many projects won't be successful if you have an unhappy employee. So obviously it's a careful balancing act on trying to balance both the needs of the organization and the needs of the employee and trying to find a common middle ground what makes sense when you're kind of setting the landscape for structuring your mobility project.

Debra Moses:
Yes, I agree. I agree with that. I think, Jay, you're going to discuss a bit on some of the non-employees who might be crossing a border, such as U.S. citizens. It's not only just cross-border employees that we have here in Canada. I'm not sure if you can speak on that.

Non-Employees Crossing a Border
Jay Park:
Right. Right. So, I mean, unlike in Canada where income tax is assessed based on the residency, U.S. is one of two country in the world that basically assessing income tax based on one's citizenship and permanent resident status, regardless of one's actual residency. So when U.S. citizen and green card holder employee move to Canada, they'll continue to be subject to U.S. federal income tax and filing requirement in addition to the filing of Canadian income tax return as a Canadian resident. In general, there wouldn't be any U.S. income tax liability, as long as majority of their activities outside of the U.S. However, what these individuals have to watch out for is the disclosure requirement relating to ownership of a non U.S. asset.

Daren Raoux:
Just on that, Jay, some of this disclosure non assets is pretty complicated. There's something kind of key points that the taxpayers need to understand. Is it as simple as filling in a simple form or is it more than that, for example?

Jay Park:
Well, I mean, the forms can be quite complicated. In general, these forms can range from anywhere from five to 15 pages. And it's just not simple informational form that we have. A lot of these form actually involves an actual calculation of a tax and interest and penalty. I mean, the most common asset that we see that require IRS disclosures are Canadian corporation, Canadian bank account, trust, partnership, certain pension plan other than RSP and RRIF, and TFSA non U.S. mutual fund also require annual finding as well, and generally have a very adverse U.S. tax consequences.

So we generally advise our U.S. person client against owning these type of assets and penalty for failure to file this form on a timely basis can be as high as $10,000 per each form. So penalty can add up pretty quickly. I mean, there is an amnesty program offered by the IRS, which can effectively eliminate these late filing penalty as long as certain requirements are met. Then, and it is the first time that the taxpayers is requesting such waiver, but U.S. filing requirements for U.S. citizen and U.S. green card holder residing outside of the U.S. can be quite complex.

Kevin Mcnab:
And there you mentioned that there's potential exposure for individuals that own assets, but that exposure can also carry over to foreign corporations. Canadian corporations owning U.S. real property, there's an entire tax regime in there that potentially creates additional exposure and filing requirements for Canadian corporations as well. So it's not just something that individuals need to be aware of, but it's also Canadian companies owning any type of asset in the U.S. that that can often lead to some potential exposure.

And along those lines if you are starting to consider hiring individuals in the U.S. to work for your Canadian company, that kind of leads down the path of identifying your federal tax filing requirements and understanding what that relationship is going to be with that person that's working for you in the U.S. Are you going to be establishing a permanent residence in the U.S. either through having an office or place of business down there, or through some sort of service permit establishment, so that I know that's one thing that we have to kind of take a look at. And then along those lines, there are certain exceptions that are available depending on what you're doing in the U.S.

So for us, it starts off with doing some of that analysis, figuring out what exposure that individual person's creating for us at the federal level, and then figuring out the filing requirements. And that's important because while you may not be owing any additional tax in the U.S. through some of these disclosures, there are potentially some significant penalties associated with failure of file. There's about $10,000 penalty for the treaty-based disclosure and a $25,000 penalty for related party disclosures. So we want to make sure that we're tracking this stuff and getting our filing requirements figured out because we want to help make sure that we're mitigating the risk for companies that are expanding down to the U.S.

Daren Raoux:
So Kevin, do you need to worry about state jurisdictions or local or is it just really at the federal level kind of really should be focused on?

State tax exposure
Kevin Mcnab:
Yeah, no. State's probably even more complex of an issue. And we won't have time to really kind of get into all the nuances today, but for all intense and purposes, each of the 50 states operates essentially independent of one another. So you've got 50 sets of state tax regimes that you've got to be aware of and the interaction between the state taxation and the federal taxation, and how that works with the Canada/U.S. Treaty. It's all very state specific. So part of what we can also do is help people take a look at what activities they're engaging in on a state-by-state basis and assess does that create nexus and does that create income tax, filing requirements, sales tax filing requirements? And help our clients kind of work through all of those complexities to really come up with an overall game plan of how you can enter into the U.S. market. Because at the end of the day, it's one of those things that the second you step foot in the U.S., whether you like it or not, you're likely going to be some subject to some sort of tax compliance.

So it's important as we continue to stress in this discussion that we're tracking information, that we're having these conversations, and that we're really kind of aware of where the potential pitfalls may lie.

Debra Moses:
Wow. It sounds more complicated than what we do here, right, Daren? Are there any additional state tax exposures that you need to be aware of just beside the income tax filings?

Kevin Mcnab:
Yeah. I mean, similar to the regimes and the things you have in Canada, you're going to have to be concerned with potential payroll tax. So you're going to have to worry about the appropriate federal and state source deductions and remittances. As I mentioned, sales tax, it's somewhat similar to HST, but there are a lot of key differences. So understanding that as well. And really just ... Yeah, I think it's a number of different regimes, but when you kind of add them all together, it creates kind of a complex web of things that Canadian businesses expanding to the U.S. need to be aware of before they enter their market, if possible. But if not, trying to get caught up on that as quickly as possible.

Debra Moses:
Wow. That's very interesting, lots to think about. I want to thank you to Daren, Jay, and Kevin. It was really useful. Hopefully everybody found some topics of interest to come in. Based on what I heard, it appears that tracking your employees is key in both the corporate and personal taxation and ensuring there are written policies and understanding what your employees are doing for the employer in both countries. Very, very interesting topics.

Our next episode will be on outbound investment and listen to our previous episodes on BEPS and COVID-19. Subscribe and tune into the podcast series.


The information in this publication is current as of April 6, 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.
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