It’s time to test your payroll knowledge. In the following scenario, what do you think is the correct province of employment?
Sharon is a member of the board of directors of a Canadian resource company. Although the corporate headquarters are in Vancouver, the company is active all over the world. Sharon is a UK citizen and resident. The employer’s board meetings are held at the company’s offices in Toronto and Sharon travels there to attend these in person. Sharon only receives fees for the meetings she attends. She is not otherwise an employee of the company. Her director’s fees are processed from the company’s Vancouver head office.
In this situation, the correct province of employment is Ontario.
Let’s look at the reasons why.
First, director’s fees are employment income, the same as for any other salary or wages. That’s because being a member of a corporate board of directors is an “office”. As such, the director’s fees are “salary or wages”; in other words, director’s fees are employment income subject to normal source deductions and liable for reporting in Box 14 on a T4.
Second, like any other employment income, when a person is paid director’s fees the province of employment is determined based on the employer’s permanent establishment. There are two rules for this purpose:
- If an employee reports to work at a permanent establishment of the employer, then the location of that establishment determines the province of employment; and
- If an employee does not report to any permanent establishment of the employer, then the location of the permanent establishment from which the person is paid determines the province of employment.
Above we said that the employer has a permanent establishment in Toronto, which is where the board of director’s meetings are held. Remember that “reporting to work” for this purpose means physically presenting oneself. But is a director attending such a meeting “reporting to work” in this way? Clearly, the answer must be yes. As a director, whose sole duties are to attend board meetings, attending these meetings is “reporting to work”. There is no other way to look at it.
Note, that slight changes in the circumstances above would change the province of employment.
For example, if the company held its board meetings in Toronto, not at its own offices, but in hotel meeting rooms, rented for this purpose on a short-term basis, Sharon would not be reporting to work at an employer’s permanent establishment. Then the second bullet above would apply and the province of employment would be British Columbia.
If Sharon did not attend these Toronto meetings in person, but through video conferencing, the CRA does not consider this would be performing employment services in Canada. Since, Sharon is a UK resident, the Canada – UK income tax treaty applies and under that treaty Canada can only tax employment income for UK residents to the extent that employment services are performed in Canada. In other words, the province of employment doesn’t matter, since the fees wouldn’t be subject to income tax or reporting in Canada.
The important fact here is not where Sharon performs the services for which she is paid director’s fees. The important fact is that Sharon is covered by the Canada – UK income tax treaty. If Sharon was a resident of a country with which Canada did not have an income tax treaty (here is a list of countries showing the status of any income tax treaty with Canada), it wouldn’t matter whether Sharon attended board meetings in person in Toronto or attended these remotely via video conferencing. It’s the income tax treaty with Canada that makes Sharon’s director’s fees non-taxable in Canada, in any of the following circumstances:
- Sharon attending these Toronto meetings remotely, via video conferencing;
- These meetings were held in conference rooms, rented on a short-term basis at a resort located outside of Canada, and Sharon attended in person.
- These meetings were held at one of the company’s permanent establishments outside Canada, and Sharon attended in person.
Without a tax treaty, none of the circumstances above would matter and Sharon’s director’s fees would be employment income subject to income tax source deductions and T4 reporting. In that case, for numbers 1 and 2 above the province of employment would be BC, since Sharon would not be reporting to work at an employer’s permanent establishment and would be paid from one in BC. For number 3 above, “ZZ” is the correct province of employment, since Sharon would be reporting to work at an employer’s permanent establishment outside of Canada.
Alan McEwen is a payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at email@example.com, (905) 401-4052 or visit www.alanrmcewen.com for more information. This article first appeared on Canadian HR Reporter and Canadian Payroll Reporter on February 19, 2013.