As previously reported, the Minister of Immigration, Refugees and Citizenship recently announced Canada’s new Tech Talent Strategy during Collision 2023. Among other things, this Tech Talent Strategy includes public and private consultations to consider possible ways that Canada can promote itself as a destination for digital nomads.
Why is attracting digital nomads important to Canada? According to the Backgrounder on Canada’s Tech Talent Strategy, Canada expects that some digital nomads who initially enter the country to work remotely will decide to seek opportunities with Canadian employers. When they receive a job offer from a Canadian company, they would be able to bring their skills to a Canadian employer by applying for a temporary work permit or even permanent residence.
If the Government of Canada is serious about attracting digital nomads, certain changes to Canada’s immigration and tax laws are necessary. An overview of the relevant immigration and tax considerations appears below.
Immigration law considerations
Canada’s current immigration laws provide only limited recognition of digital nomads. In order to attract these foreign nationals to Canada, additional changes to Canada’s immigration laws are required.
Current immigration laws
As mentioned above, Immigration, Refugees and Citizenship Canada (IRCC) already recognizes digital nomads, at least to an extent. For example, Section 196 of the Immigration and Refugee Protection Regulations (IRPR) states the following:
A foreign national must not work in Canada unless authorized to do so by a work permit or these Regulations.
In other words, activities that do not constitute work in Canada should not require a work permit.
The term “work” is defined in R2 as “an activity for which wages are paid or commission is earned, or that is in direct competition with the activities of Canadian citizens or permanent residents in the Canadian labour market.” This suggests that an activity will not be considered “work” if:
- The foreign national does not earn compensation from a Canadian source; and
- It is not an activity for which a Canadian citizen or permanent resident might otherwise be hired to perform.
The online guidance provided by IRCC also provides further information regarding what is (and is not) considered “work.” This online guidance specifically states that “long distance (by telephone or Internet) work done by a temporary resident whose employer is outside Canada and who is remunerated from outside Canada” is not considered work.
Nevertheless, there is currently no distinct temporary resident category for digital nomads in Canada. As a result, they need to enter Canada under visitor status, which can cause potential challenges. For example:
- A visitor is typically admitted to Canada for a default period of six months, unless the Canada Border Services Agency (CBSA) officer decides to admit them for a lesser period. Although it is often possible extend visitor status within Canada for another six months, the absence of a separate digital nomad category makes it difficult for visitors to remain in Canada for extended periods of time.
- A visitor who departs from Canada will need to make a brand new application for admission upon his or her return to Canada, even if their prior period of authorized admission has not yet expired. When a visitor applies for readmission to Canada, there is no guarantee that they will be readmitted, even for the remainder of their prior period of authorized admission.
Proposed changes to improve temporary resident options for digital nomads
The creation of a distinct temporary resident category specifically for digital nomads could make Canada a more desirable destination for such workers, since it would allow them to remain in Canada for extended periods of time and, if they need to travel abroad, it could also facilitate their re-entry to Canada. If such a category were to be established, what benefits would it offer to digital nomads and what eligibility requirements would apply? We can offer following suggestions:
- Foreign nationals seeking admission to Canada as digital nomads could be admitted for an initial period of two years, with the ability to extend or renew their status for additional periods of two years at a time. This suggested duration is similar to the period of admission currently granted to holders of super visas.
- Of course, it is likely that the Government of Canada would not want digital nomads to be eligible for provincial health care. For this reason, it could require them to provide proof of private medical insurance; a similar requirement is already imposed on parents and grandparents of Canadian citizens and permanent residents, who are seeking super visas. In the case of a super visa, an applicant’s medical insurance must comply with the following requirements:
- It must be paid in full, or by instalments with a deposit;
- It must be valid for at least one year from the date that the applicant will enter Canada;
- It must cover the applicant’s health care, hospitalization and repatriation costs; and
- It must provide for at least CA$100,000 of emergency coverage.
- Some countries that currently welcome digital nomads require them to demonstrate that they earn stable income from foreign sources, which would be sufficient to cover their living expenses. For example, Costa Rica requires digital nomads to provide proof of stable net income of at least CA$3,000 per month (CA$5,000 per month for families). The Government of Canada could impose a similar net income requirement on applicants seeking digital nomad status.
Tax law considerations
Under the current law, digital nomads (and the foreign companies who employ them) may be required to comply with Canadian income tax laws. We highlight some of these tax considerations below.
Payroll compliance
Non-resident employers with employees who work remotely from Canada, and non-residents that hire independent contractors who will render services in Canada, will have withholding obligations. These withholding obligations will apply regardless of whether income tax is ultimately payable, or relief is available under one of Canada’s double tax treaties. In particular:
- If the digital nomad is a Canadian resident, the employer will need to withhold and remit income tax, Canada Pension Plan (CPP) and Employment Insurance (EI) payments. Even if the digital nomad does not ordinarily live in Canada, they could be deemed to be a resident if they are in Canada for 183 days or more in any 12-month period.
- If an individual is not a Canadian resident but works in Canada (i.e., as a digital nomad), the employer, whether or not Canadian, must withhold and remit payroll taxes. A withholding tax waiver (Reg. 102 Waiver) may be obtained if the employee is resident in a country that has a tax treaty with Canada, which exempts them from tax in Canada, but any such waiver would need to be obtained prospectively. As an alternative to a Reg. 102 Waiver, an employer can apply to become a “qualifying non-resident employer,” which is valid for two years, provided certain conditions are met.
- If the digital nomad is an independent contractor (as opposed to an employee) who is “rendering services” in Canada, there may be a 15% withholding obligation on the payor. A similar waiver (Reg. 105 Waiver) can be obtained to relieve the payor of its withholding obligation.
The process for obtaining a Reg. 102 Waiver, obtaining a Reg. 105 Waiver, or becoming a qualifying non-resident employer can be lengthy and burdensome. It also requires the digital nomad to notify the company paying them, which may not always be practical.
If the Government of Canada wishes to attract digital nomads to Canada, the Canada Revenue Agency (CRA) should create a simple and streamlined procedure that will facilitate tax compliance. For example, it may wish to consider exempting digital nomads from withholding obligations and instead impose a requirement to file tax returns and self-assess the tax payable on their income earned while in Canada.
CRA guidance on carrying on a business in Canada
Non-resident entities that carry on business in Canada are subject to income tax. As a result, non-resident employers with digital nomad employees must consider whether they are “carrying on a business in Canada” by virtue of the employee’s presence in Canada. Even if there is no tax payable, or relief is available under a double tax treaty, any non-resident that carries on business in Canada must still file an income tax return.
The CRA considers business to be carried on where profit-producing activities take place, which is generally a low threshold. That said, it is a question of fact determined by considering several criteria, including whether agents or employees of the non-resident are based in Canada.
In a recent publication,1 the CRA was asked to consider whether a US-resident company, with employees working remotely in Canada, was carrying on business in Canada and, if so, whether it was earning income through a permanent establishment.2 The CRA stated that the location of employees is relevant to the determination of where a taxpayer is carrying on business, to the extent that it impacts (among other things):
- Where decisions to purchase and sell are made;
- Where goods are produced or services performed;
- Whether activities in Canada are merely ancillary to the main business; and
- Where a reasonable person would consider the business to be carried on in Canada.
In addition, the CRA distinguished “internal support” (e.g., an accountant or human resources professional providing services to the company) from external services (e.g., an employee providing consulting services to clients or product development), finding that the latter is more likely to inform where business is carried on.
With respect to the permanent establishment determination, the CRA confirmed its previous position that the home office of an employee does not, in and of itself, create a permanent establishment. However, a permanent establishment may be established where an employee works from home in Canada and provides services for an aggregate of at least 183 days in any 12-month period in respect of a single project, or where the employee routinely enters into contracts in Canada on behalf of the employer.
The increased prevalence of digital nomads raises questions regarding whether the criteria historically used to determine whether a taxpayer is carrying on business in Canada or has a permanent establishment is still appropriate. The CRA should consider publishing guidance specific to digital nomads, which addresses the factors that it considers relevant in the digital age.
Conclusion
Canada clearly has the ability to make it a top destination for digital nomads. However, the key to doing so will be the creation of:
- A well-drafted, distinct temporary resident category designed specifically for digital nomads;
- A simple and streamlined procedure that will facilitate tax compliance for digital nomads (and the non-resident employers or entities who utilize their services), including a possible exemption from withholding obligations; and
- New guidance that confirms:
- When one or more digital nomads in Canada establishes that non-resident employers, or entities who utilize their services, are carrying on business in Canada or maintaining a permanent establishment in Canada; and/or
- When a safe haven exists, if a digital nomad’s services are utilized.
Source : Dentons