Effective January 1, 2024, the Canada Revenue Agency (CRA) has a new administrative policy (New Administrative Policy) for determining the province or territory of employment (POE) for payroll deduction purposes of employees who work remotely pursuant to a full-time remote work agreement. The New Administrative Policy applies for determining the POE for the purpose of income tax, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Employment Insurance (EI), and Quebec Parental Insurance Plan (QPIP) deductions. For all other purposes, including, where applicable, Employer Health Tax in Ontario, the rules set out in the applicable legislation will remain unaffected by the New Administrative Policy.
A high-level summary of the New Administrative Policy is set out below.
Purpose of the POE
When an employer pays employment income such as salaries, wages or commissions, the employee’s POE must be determined so that the proper deductions are withheld and remitted for income tax, CPP/QPP, EI and QPIP.
The POE depends on whether the employee reports to work at an establishment of the employer (either physically, or as described below, by virtue of being considered to be “attached” to an establishment). If the employee works in Canada but does not report for work at an establishment of the employer, the POE is the province or territory where the establishment of the employer from which the employee’s salary is paid. Generally, this is either the location of the employer’s payroll department or payroll records, or the establishment which actually incurs the expense for T2 reporting purposes.
Establishment of the Employer
For income tax, CPP and EI withholding purposes (as set out in the third paragraph of the New Administrative Policy), the CRA notes that an establishment of the employer is any place or premises in Canada that the employer owns, leases or rents, and where employees report to work or from which employees are paid. This does not need to be a permanent physical location and can include temporary physical locations such as a construction job site.
The CRA also notes that an employee’s home office is generally not considered an establishment of the employer. However, there are certain situations where an employee home office will be considered an establishment of the employer, including where the employee has general authority to contract for the employer, or where the employee has a stock of merchandise owned by the employer from which they regularly fill orders received.
New Administrative Policy — Remote Workers
Where an employee is a resident in Canada for the full year, an employee is considered to be reporting for work at an establishment of the employer if one of the following applies:
- The employee reports for work physically at an establishment of the employer, in which case, there is no minimum amount of time the employee has to report to that place; or
- Where a “full-time remote work agreement” was made, the employee can be reasonably considered “attached to an establishment of the employer.”
Full-Time Remote Work Agreement
The CRA generally considers a full-time remote work agreement to exist between the employer and the employee when the following arrangements are made:
- The agreement is either temporary or permanent;
- The employer directs or allows the employee to perform their employment duties full-time (100%) remotely; and
- The employment duties are to be performed at one or more locations that are not establishments of the employer.
Both the employer and the employee must be able to justify that a full-time remote work agreement was made.
If a full-time remote work agreement was made, the New Administrative Policy applies. It is then necessary to determine if the employee is reasonably considered to be “attached to an establishment of the employer.” If a full-time report work agreement was not made, the New Administrative Policy does not apply.
Attached to an Establishment of the Employer
The New Administrative Policy provides that determining whether an employee is reasonably considered to be "attached to an establishment of the employer" is a fact-specific analysis.
The primary indicator to determine if an employee can reasonably be considered "attached to an establishment of the employer" is, if not for the full-time remote work agreement, whether the employee would physically report to the particular establishment of the employer to carry out the functions related to their employment duties. For employees who physically reported to an establishment of the employer immediately prior to entering a full-time remote work agreement, the New Administrative Policy indicates that such establishment is the one to which they would be reasonably considered to be attached, unless the employee's circumstances or the nature of their duties changed.
The following secondary indicators can help determine the establishment of the employer where an employee, if not for the full-time remote work agreement, would go to carry out their employment duties:
- The establishment where the employee attends or would attend in-person meetings, through any type of communication;
- The establishment where the employee receives or would receive work-related material or equipment or associated instructions and assistance;
- The establishment where the employee comes or would come in-person to receive instructions from their employer regarding their duties, through any type of communication;
- The establishment that is responsible for or supervises the employee, as indicated in the contractual agreements between the employer and the employee; and,
- The establishment to which the employee would report based on the nature of the duties performed by the employee.
Generally, all the above indicators need to be reviewed together to determine whether the employee is reasonably considered to be "attached to an establishment of the employer."
To be considered “reasonable” by the CRA, a determination that an employee is attached to an establishment based on the indicators above must be supported by the facts of the employee’s employment situation. It is not considered reasonable to attach the employee to an establishment of the employer to avoid source deductions or payroll contributions in a province or territory.
An employee can be reasonably considered to be attached to more than one establishment of the employer. If this happens, the same indicators should be used to determine which establishment of the employer the employee can reasonably be considered as being more closely attached to.
If you have questions, please reach out to a member of our Pensions, Benefits & Executive Compensation group or your usual Blakes contact.
