Episode 09: Inbound into Canada — Employees and Equity Compensation

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CROSS-BORDER TAX PODCAST SERIES

Companies coming into Canada face a variety of challenges. In this episode we will discuss the implications of hiring or moving employees when companies are coming into Canada. BDO Tax Partner Debra Moses, alongside BDO Senior Manager from the Expatriate Tax Services team Marie Neill, help answer questions to these various challenges.

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Debra Moses:
Welcome to the second season of our cross-border tax podcast series. My name is Debra Moses and I am the leader of our Global Employer Services practice at BDO Canada. Companies coming into Canada are facing a variety of challenges today. In this episode, we will discuss the implications of hiring or moving employees, where companies are coming inbound into Canada. The classification of an independent contractor versus an employee. We will look at what companies should be doing before the employees enter or become employees in Canada such as structure, registration, employment authorization etc.

We will also discuss the various alternative employment structures that we have recently seen as well as some equity compensation considerations.

Joining me today is Marie Neill who is a Senior Manager in our Global Employer Services team.

Marie, What are we seeing when companies are entering Canada and looking to move or hire employees? I understand that there are various types of situations that companies do consider.

Marie Neill:

Hi Debra. Yes, over the past couple of years we’ve increasingly been seeing different types of arrangements when companies are hiring employees in Canada.

Debra Moses:
How did companies traditionally set up when they were first expanding into Canada?

Marie Neill:
We hear a lot of companies, in particular U.S. companies, saying that they will be bringing in an independent contractor to start out before they bring in any local hire employees. Unfortunately this does not always work as the classification of an independent contractor in the U.S. is less strict than it is for Canadian purposes and therefore most times this person ends up being an employee for Canadian tax. This brings with it all of the implications of having an employee in Canada regardless of what the contract might say.

Debra Moses:
Interesting, what are some of those implications that would happen?


Marie Neill:

Often it would involve setting up a Canadian subsidiary, creating local employment contracts, engaging with a local payroll provider, and getting the immigration sorted. That brings ongoing compliance obligations and legal fees etc., and often companies don’t want to get that involved when a market is being tested or there’s a small local employee group.

Debra Moses:
I can understand that. So what are we seeing, are companies looking for different alternatives? What do we see?

Marie Neill:
We have recently seen a revival of Global Employment Companies (GECs), and are also now seeing Professional Employment Organizations (PEOs) and the use of Employers of Record (EORs).

Debra Moses:
Why do you think that is?

Marie Neill:
With the COVID pandemic, employees started providing services remotely and there’s definitely been a desire for that flexibility to continue. It also offers a wider talent pool for employers to access and we know that employers are having challenges acquiring global talent. However, that means that a lot of companies are now having to handle hiring and paying employees in a country where they previously haven’t had a footprint.

Debra Moses :
What are the benefits of these?

Marie Neill:
From a practical perspective, there are lots of administrative burdens around employing individuals in a new country as I mentioned before, especially when a company is exploring opportunities there for the first time. These new types of arrangements offer a “one stop shop” for companies in this kind of situation.

Debra Moses:
But Marie, GECs have been around for many years ago. What is different now?

Marie Neill:
Basically a GEC is a separate legal entity that exists within the overall group structure of an organization. They become the contractual employer of the relevant staff members and would usually exist within a large multinational corporate group – a company such as someone such as our favourite search engine/maps provider who shall remain nameless! Traditionally a GEC would be used where there are a large number of mobile employees moving between countries.

But they did fall out of fashion 10-15 years ago as tax authorities started to look closely at the form vs substance of the arrangement.

Debra Moses:
So that is a GEC, I understand that but how does a GECs differ from PEOs and EORs?

Marie Neill:
A PEO is an unrelated entity – a third party - that is generally used as an outsourced HR solution to manage staff in locations where the business doesn’t have a presence. While services offered by PEOs do vary, they would generally include payroll processing, onboarding of employees, recruitment, benefits management and other HR solutions.

Debra Moses:
And EORS, how do they differ then?

Marie Neill:
Services offered by EORs will generally incorporate the same functions as that for a PEO, but with the addition of them taking on the legal employment relationship from the original employer.

With an EOR the employment relationship is transferred while with the PEO solution this is generally not the case.

Debra Moses:
Thanks Marie. I can imagine that there are a number of international corporate issues to deal with the contracts, as well as transfer pricing to see about any charges, there would also be things to be looked at from a legal perspective regarding the employment contracts.

There may be larger buying power with these types of alternative employment structures but I would think you also have to look into other issues such as the employee pensions as well as any equity compensation that may have been issued to these employees?

Marie Neill :
Right, it is important that we are aware of any type of alternative arrangement that might be in place as there are various implications, like equity compensation as you say. In your experience, are these types of alternative employment structures available globally?

Debra Moses:
It depends very much on the country – in Europe a “co-employment” model isn’t as easily recognized by some authorities. Other countries are also enacting legislation to render PEOs ineffective – for example, Mexico has restricted outsourcing so much that it’s effectively prohibited and Germany requires them to formally register and different licences that they require. It is becoming more strict in some countries.

Marie Neill:
So if tax authorities in other countries have started to look at this, what about the CRA? Have they provided any thoughts on this?

Debra Moses:
Not that I am aware of, not as yet – I’m not sure how much this is even on their radar but it wouldn’t be a surprise if they start looking at these types of arrangements more closely in the future. We have been questioned by many other tax and law professionals as to how these are treated. We would think the CRA would look at this mostly as an outsourcing arrangement, however it’s questionable as to how equity would be treated. There are many outsourcing availability, which is fine, but how are they treating the equity?

Marie Neill:
How do we know if a company is using a PEO or EOR?

Debra Moses:
That’s a very good question! Often companies don’t even really think about it because in their mind they just have employees in that location – but it’s very important to ask specifically. This can have an impact depending on the type of work we are being requested to do for our clients coming into Canada, they may have questions about something that could have a totally different answer if they are using a PEO or EOR.

Marie Neill:
That is a good point. Going back to employee equity, what is it that companies need to look at?

Debra Moses:
I would think companies will need to look to see whether or not the equity can even be issued if the employment relationship changes or how would they be able to do payroll if they are not the issuers of the equity. I have heard that some of these alternative employment structures specifically exclude equity from their services because of the complications.

We have been approached by some PEOs that have been hired by other PEOs to give an opinion on how to treat the equity within their payroll. This seems to be an area that they are trying to have resolved, however we have not encountered a solution as of yet.

There are many outstanding questions that specifically relate to equity. Marie do you agree? What are the end clients doing with their agreements?

Marie Neill:
Absolutely - there are a number of factors to consider. If we think about a traditional scenario where a foreign parent issues equity, either directly or via a stock-option agreement or something similar, for example, Canadian employees of a Canadian subsidiary, there’s a direct relationship between the issuer of the equity and the employer of the individuals in Canada. This is the type of relationship that has historically been contemplated in tax law, if I give an example such as when enabling Canadian employees to potentially obtain beneficial tax treatment in respect of stock options which they can maybe get even when the options are granted by the foreign parent entity. However, without that direct inter-company relationship the position is much less clear.

This is especially true where an EOR is being used, as the stated intention is for the EOR to take on that legal employment relationship. It may not even be possible under plan documents for equity to be issued to individuals who are not employees of the company group, now that's a securities law question and as you know neither of us are lawyers but it’s definitely something that should be taken into account.

Debra Moses:
I would think this would be an issue for corporations wanting to issue equity compensation to employees in Canada. I know we have seen a few client's scenarios, even some PEOs calling us for advice.

Marie Neill:
It’s hard for sure, especially because these types of arrangements are so new. PEOs and EORs are still trying to figure out what this looks like in practicality and how much risk and responsibility they’re able, or willing, to take on. A couple of clients we’ve worked with weren’t even aware that equity is excluded from their contract with the EOR when they signed the documents.

Debra Moses:
So who would deal with the payroll then?

Marie Neill:
Payroll requirements fall onto the “payer” of the compensation, so if you have the situation where the end client is the entity issuing the shares, that end client could be regarded as the payer for this purpose. This could then generate all of the Canadian compliance and payroll requirements that the EOR is specifically being used to mitigate.

Debra Moses:
It seems the payroll would work for regular compensation but how are companies handling the equity?

Marie Neill:
We have seen situations where companies decide to deliver cash-based long-term incentives in this scenario instead of settling in equity precisely because of these complications. However, that can also create other considerations that would need to be addressed, such as compliance with the salary deferral arrangement rules and as you know, we could talk for hours completely on that.

Debra Moses:
Thanks Marie. I would say that we can summarize that whether you are bringing in an independent contractor or employee, setting up a Canadian subsidiary, or setting up a GEC or hiring a PEO or EOR, there is a lot to be considered before determining the most appropriate structure to bring operations into Canada.

Certainly contact us if you have any questions. We would be happy to help you navigate these changing times. And in our next episode, we’ll continue the conversation with an interesting discussion about how companies coming into Canada should plan their finance operation strategies.

Subscribe and tune into the cross-border tax podcast series.




The information in this publication is current as of March 22, 2022.

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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Episode 02: The impact of
BEPS on multinational
enterprises and various
workforces

Understanding the impact of BEPS on multinationals for indirect tax and a global workforce.

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