1. Hot Tax Issues and Challenges – Mobility to and from Canada Bill Fridfinnson February 21, 2013

2. © Deloitte LLP and affiliated entities. Hot Tax Issues and Challenges Agenda 1.Non-resident Travelers to Canada 2.Overseas Employment Tax Credit – Impact of Phase-out 3.Tax Considerations of Temporary Living Costs 4.Stock Option Plans - Issues and Challenges 1Hot Tax issues and Challenges – Mobility to and from Canada

3. Non-resident Travelers to Canada 2

4. © Deloitte LLP and affiliated entities. Non-resident Travelers to Canada 3 Hot Tax issues and Challenges – Mobility to and from Canada Reg. 105/Transfer Pricing (Corporate) PE/Services PE (Corporate) Reg 102/ Waivers (HR-Payroll)

5. © Deloitte LLP and affiliated entities. Current State – Regulation 102 Rules Under Regulation 102 of the ITA, every person (corporation, partnership, other legal entity) paying remuneration to non- resident employees working in Canada must withhold Canadian income tax at source on the Canadian source earnings. Withholding obligation applies to non-resident employers. Any amount of Canadian source income is subject to the rules….there is no deminimus amount. Withholding obligation applies even if the employee is ultimately exempt from Canadian tax under a Tax Treaty. Only exception is where a waiver is obtained authorizing no withholding. 4 Hot Tax issues and Challenges – Mobility to and from Canada

6. © Deloitte LLP and affiliated entities. Current State – Regulation 102 RULES The current waiver process is done on an employee-by- employee basis: The R102 - J waiver is a joint employee/employer application used when the employee’s total Canadian remuneration is less than $10,000 for the US residents or $5,000 for residents of other treaty countries. The R102 - R waiver is an employee only application used when the employee is expected to earn more than $10,000 when a US resident (or $5,000 when a resident of another treaty country), but the income is exempt under other treaty conditions (i.e. remuneration not borne by a PE the NR employer has in Canada). 5Hot Tax issues and Challenges – Mobility to and from Canada

7. © Deloitte LLP and affiliated entities. Current State – Enforcement of Rules Employer Considerations: CRA is currently assessing Reg. 102 tax withholdings in all situations were a waiver has not be obtained. The employer must prepare a T4 slip and T4 Summary to report the Canadian source compensation and tax withheld at source. CRA requires the non-resident employer to register and open payroll accounts. The employer is liable to pay the taxes that should have been withheld from the NR employees, but wasn’t. Penalties of 10% (or 20% for certain situations) are being imposed on tax amounts which the employer was required to withhold, plus interest. The negotiated deals or concessions with CRA that may have been allowed in the past by different district offices, are no longer happening. The same enforcement of the rules is now being applied consistently all across the country. 6 Hot Tax issues and Challenges – Mobility to and from Canada

8. © Deloitte LLP and affiliated entities. Current State – Enforcement of Rules Employee Considerations: The NR employee is required to obtain either a Canadian SIN or ITN (Individual Tax Number) for reporting purposes (e.g. T4 slip). If the employee is treaty exempt but no waiver was filed, they must file a NIL personal tax return to be refunded the Reg. 102 taxes paid. CRA is not allowing any withholding taxes be refunded back to the Company directly. All refunds must be made in the name of the employee. This can be a problem if the tax was originally funded by the employer. The R102-R waiver can’t be filed retroactively. It must be submitted at least 30 days prior to the employee beginning work in Canada. The R102-J waiver can however be approved retroactively up to 60 days prior to the date a complete waiver application is received. 7 Hot Tax issues and Challenges – Mobility to and from Canada

9. © Deloitte LLP and affiliated entities. Future State – What Should NR Companies be doing? CRA is continuing its active audit activity on cross border services so Companies should not ignore the Reg. 102 issue. Instead they should: Put policies and processes in place to track employees in Canada and determine the Canadian source remuneration. Consider use of the voluntary disclosure program to get prior years into compliance, before the problem is identified on audit. −With a voluntary disclosure the penalties are generally waived Use the waiver process, but note that waivers for employees who were non-compliant in prior years, won’t be approved. Realize that to qualify for the proposed “employer certification” program, the employer will need to be compliant in the current year and possibly prior years. 8Hot Tax issues and Challenges – Mobility to and from Canada

10. © Deloitte LLP and affiliated entities. Future State – What is CRA doing? The CRA recognizes the administrative burden faced by NR employers and treaty exempt NR employees with the reporting and withholding obligations. CRA is working on a more comprehensive policy to make it easier for employers to comply, including : –New Dec. 2012 administrative relief for NR employees in Canada on conferences. –Possible “employer certification” program which will permit NR companies to become “certified” and therefore allow all NR employees meeting certain conditions (e.g. days threshold - under 60 days) to be exempted from the Reg. 102 rules. 9Hot Tax issues and Challenges – Mobility to and from Canada

11. © Deloitte LLP and affiliated entities. Administrative Relief - Conferences Dec. 21, 2012 CRA issued administrative relief from Reg.102 W/H taxes and reporting (e.g. T4s) for certain people attending conferences in Canada. Relief applies only if there is an income tax treaty between Canada and the employee’s country of residence. Conditions required: i.The NR employee must be present in Canada for 10 days or less (including travel time) to attend the conference. ii.If the employee is a resident of the US, the employee must earn less than $10,000 in the year from employment (including the amount earned during the conference period), or $5,000 if the employee is resident in another treaty country. 10Hot Tax issues and Challenges – Mobility to and from Canada

12. © Deloitte LLP and affiliated entities. Administrative Relief - Conferences If an employee is working in Canada immediately before or after the conference, only the days (maximum of 10) spent at the conference will be exempted. Employee still required to obtain a waiver of the W/H tax for the work days spent before or after. The relief will not be allowed in circumstances the CRA considers to be abusive. For example the relief will not apply where an employee participates in numerous conferences in a year. 11Hot Tax issues and Challenges – Mobility to and from Canada

13. © Deloitte LLP and affiliated entities. Administrative Relief - Conferences What is a “ Conference”? CRA has defined a conference to be a formal meeting attended by a minimum of 30 participants for professional purposes. The participants may work for the same employer or different employers. The participants are not providing services for which their employer is receiving a fee from another person. In addition, the participants are not soliciting business on behalf of their employer; providing services to a parent, subsidiary, or partnership related to their employer; marketing their employer’s services or products, or meeting with clients regarding their employer’s business. 12Hot Tax issues and Challenges – Mobility to and from Canada

14. Overseas Employment Tax Credit Impact of Phase-out 13

15. © Deloitte LLP and affiliated entities. OETC Phase-Out – What is it? The March 29, 2012 Federal Budget included an unwelcome surprise of the phase-out and ultimate elimination of the OETC. OETC = an individual’s tax payable on 80% of his/her qualifying foreign income up to a maximum of $100,000 In Alberta the maximum benefit of the OETC is $80,000 x 39% tax rate = $31,200 The OETC is being phased-out through a reduction in the percentage of qualifying income, eligible for the credit. 14Hot Tax issues and Challenges – Mobility to and from Canada

16. © Deloitte LLP and affiliated entities. OETC Phase-Out The Phase-out between 2012 – 2016 is as follows: 2012 - 80% of qualifying income up to $100,000 2013 - 60% of qualifying income up to $100,000 2014 - 40% of qualifying income up to $100,000 2015 - 20% of qualifying income up to $100,000 2016 – 0% of qualifying income up to $100,000 Relief from the “Phase-out” is available where the employer is committed to a particular project in writing before March 29, 2012. 15Hot Tax issues and Challenges – Mobility to and from Canada

17. © Deloitte LLP and affiliated entities. OETC Phase-Out – relief provisions Relief from the phase-out will be extended to situations where an employer has submitted a written irrevocable tender before the budget date, but the tender was only accepted at a later date. If relief available, no phase-out in 2013-2015 (e.g. OETC still based on 80% of $100,000 of qualifying income). OETC is still eliminated entirely in 2016. 16Hot Tax issues and Challenges – Mobility to and from Canada

18. © Deloitte LLP and affiliated entities. OETC Phase-Out – What to do now? Quantify the exposure as a result of the loss of the OETC by: –Identifying which contracts/projects your employees are working on that will be grandfathered until 2015. –How does the Company tax policy address the OETC benefit….employee benefit, employer benefit or joint? –Determine the extent to which the tax savings realized by the employee from the OETC can be replaced by claiming FTCs. –Determine which employees have been guaranteed a net pay or the full benefit of the OETC in their contracts, throughout the phase-out period and beyond. 17Hot Tax issues and Challenges – Mobility to and from Canada

19. Tax Considerations of Temporary Living Costs 18

20. © Deloitte LLP and affiliated entities. Temporary Living Costs - Canada Normally employer paid housing, travel and meals costs are taxable benefits to the employee for Canadian tax purposes. An exemption from the taxable benefit rules, under Section 6(6) of the Income Tax Act applies for an employee where: –Amounts paid or allowances received must be reasonable –Employee must be working at a “special worksite” and performing duties that are “temporary” in nature –Employee maintains a self-contained domestic establishment as a principal place of residence, at their main place of employment, that: is available for use by employee and not rented out; and by virtue of distance from site, employee could not be expected to commute daily Employer should get TD4 form from employee. 19Hot Tax issues and Challenges – Mobility to and from Canada

21. © Deloitte LLP and affiliated entities. Temporary Living Costs - Canada Common Issues Identified Assignment/duties not of a temporary nature (i.e. CRA considers temporary not to exceed 2 years…but what happens if it does?) Definition of a self contained domestic establishment should include a residence where the employee either has title to the property or has a formal legal lease agreement in their name (living in a parents home does not meet the test) 20Hot Tax issues and Challenges – Mobility to and from Canada

22. © Deloitte LLP and affiliated entities. Temporary Living Costs - US Employer paid housing, travel and meals/allowances are taxable benefits to the employee for US tax purposes. Where employee is “temporarily” away from home, such employer – paid expenses where the are part of an “accountable plan” are not taxable. –“Temporary” defined to mean a work period expected to be less than 12 months at the start of the assignment –If the 12 months is exceeded than only those costs in month 13 become taxable –Where an employee makes frequent short trips to another location over a period of a couple of years, issue arises as to whether it should be considered one continuous period 21Hot Tax issues and Challenges – Mobility to and from Canada

23. © Deloitte LLP and affiliated entities. Temporary Living Costs – Challenges Different tax treatment in different countries can result in different payroll reporting and withholdings (e.g. Mexico doesn’t have any exemptions at all so all housing costs for example would be fully taxable from day 1). Tax protection or tax gross-ups may be necessary to keep the employee whole. Some countries like the US post what the prescribed per diems for food and lodging will be for most locations in the US and some foreign countries. Exceeding these amounts will result in taxable benefits arising. 22Hot Tax issues and Challenges – Mobility to and from Canada

24. Stock Option Plans - Issues and Challenges 23

25. © Deloitte LLP and affiliated entities. Stock Option Plans- Current Rules Pursuant to Section 7 of the Canadian Income Tax Act: –The difference between the exercise price of the option and the FMV of the share at date of exercise is treated as employment income for T4 purposes (i.e. (“stock option benefit”). –The stock option benefit is generally subject to a 50% personal tax deduction in Canada, so effectively only 50% of the gross benefit is subject to tax. It is therefore taxed at a similar rate to a capital gain. 24Hot Tax issues and Challenges – Mobility to and from Canada

26. © Deloitte LLP and affiliated entities. Stock Option Plans- Current Rules Pursuant to Section 7 of the Canadian Income Tax Act –To qualify for this 50% benefit, certain conditions must be met: i.There must be an agreement to issue shares/securities ii.Exercise price > FMV of shares at grant iii.Shares issued must be “prescribed shares”…a defined term! iv.The employee must be at arms length 25Hot Tax issues and Challenges – Mobility to and from Canada

27. © Deloitte LLP and affiliated entities. Stock Option Plans- Common Issues Foreign based plans (particularly UK & US drafted plans) often do not qualify for the 50% stock option deduction because: –No agreement to issue shares/securities actually exists. Basically there is only an agreement if the employee can force the Company to settle in newly issued or treasury shares. If the compensation committee (e.g. Employer) reserves the right to settle awards in shares or an equivalent amount in cash, or; The company can reduce the number of shares issuable to account for the applicable withholding taxes (e.g. net settlement), then The stock option plan is offside Section 7 of the ITA and the Plan will not qualify for the stock option deduction. This means the employee is taxable on 100% of the option benefit rather than just 50%. 26Hot Tax issues and Challenges – Mobility to and from Canada

28. © Deloitte LLP and affiliated entities. Stock Option Plan- Common Issues Foreign and Canadian based plans often do not qualify for the 50% stock option deduction because of the following common provision: The Employer (Compensation committee) authorizes the employee to satisfy the exercise of the exercise price of an option through one of the following methods: (1) Cash; (2) Broker assisted sale of shares; or (3) tender of previously acquired shares to the company. –In this scenario, the employee’s right to unilaterally tender shares violates on of the “prescribed share conditions” required to get the 50% deduction. 27Hot Tax issues and Challenges – Mobility to and from Canada

29. © Deloitte LLP and affiliated entities. Stock Option Plans- Common Fixes To ensure the 50% deduction is available to your company’s employees, the Company should: i.Have the wording for all Plan Agreements and Award Agreement reviewed to determine if the plan is offside the Canadian rules……particularly stock option plans of foreign based parent companies. ii.Modify the agreements to put Plans back onside, or add a Canadian addenda to the Plan iii.Plan documents should apply to all employees taxable in Canada on their employment income. (e.g. domestic employees, expatriate employees, short term business travelers to Canada, etc.) 28Hot Tax issues and Challenges – Mobility to and from Canada

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