Because of the pandemic, companies that were once reluctant to allow part or full-time remote work are now jumping into the remote space with both feet, and even started hiring their first fully remote employees. While this has been a great opportunity for employees and employers alike, there’s just one catch: understanding the impact of working remotely on taxes.
When working remotely, taxes can be daunting, especially if you’re employed by an international employer. In this article, we will explain where Canadian remote workers pay taxes, the unique tax implications of working remotely, and how working with a PEO can help.
If I Work Remotely, Where Do I Pay Taxes?
If you work remotely in Canada, you pay taxes in Canada. Tax obligations in Canada are based on residency, not citizenship, immigration status, or employer. Canadian citizens, foreign workers, and visa holders who work in Canada must pay income taxes in Canada, whether they’re employed by a local or global company. (There is one rare exception to residency based taxation: workers who are deemed a non-resident and exempted from paying Canadian taxes by an international tax treaty.)
Province of Employment
As a remote worker, your employer will deduct and remit taxes for you in the province where they are domiciled, not necessarily where you live. For example, if you live in the Yukon working for a Vancouver, B.C company, your employer will tax you at the B.C. rate. Remote workers employed by an international business through a PEO are likewise taxed according to the rules where the PEO is located.
Province of Residence
While your employer will tax according to the rules of their home province, you are required to pay provincial/territorial taxes where you reside. If there is a discrepancy between what your employer has remitted and what you owe, this will be reconciled with the Canadian Revenue Agency (CRA) when you file for taxes. In practice, this could mean either a bill or a refund depending on the tax rates of you and your employer’s home province.
Tax Implications of Working Remotely
Like any other worker in Canada, remote workers pay federal and provincial/territorial income tax and contribute to Employment Insurance (EI) and Canadian Pension Plan (CPP). However, there are some specific tax implications of working remotely:
1. Home Office Expenses
You may be eligible to make deductions pertaining to your home office, including a percentage of your rent, utilities, internet, and phone. However, if you receive an allowance from your employer to cover these expenses, that is a taxable benefit that must be declared on your return.
As part of your remote working taxes, each year you and your employer will work to complete a T2200 tax form. The T2200 summarizes any work from home allowances and claims you intend to make.
3. Receipts and Records
It is your responsibility to keep clear records and itemized receipts of expenses for your working remotely taxes. The CRA requires you to keep a copy of your return and all supporting documents, including receipts and your T2200, for six years.
4. Worker Misclassification
Workers are classified according to their employment relationship, not their title or contract. Employees and contractors are subject to different tax rules and labour laws. Worker misclassification is the intentionally or unintentionally incorrect categorization of workers. When discovered, worker misclassification requires payment of back taxes and fines (potentially for both employer and worker) and can trigger a tax and workplace audit.
5. Working as a Contractor
In Canada, contractors fall into two categories: sole proprieties or incorporated contractors. The tax implications of working remotely are very different for each of these categories.
- Sole Proprietors are businesses of one person, such as consultants with no employees. As a contractor, they collect and remit their own income taxes on a quarterly basis, are not issued T4 tax documents by their clients, and cannot contribute to or collect from EI without registration. They must register for an HST number to collect and remit sales tax.
- Incorporated Contractors are small businesses where the owner – the contractor – has made themselves an employee. They register their business with CRA and run their own payroll. They issue invoices to their clients and collect and remit HST. They file separate business and personal income tax returns.
Work With A PEO
Working remotely can have a big impact on how and when you file taxes. Understanding the nuances of worker classification, province of employment and province of residence, and taxes when you work remotely isn’t easy. That’s why so many choose to work with a PEO. Canadian Payroll Services delivers payroll and employee leasing services that uncomplicate remote work and taxes.
As a PEO, we hire remote Canadian workers and lease them back to their employers, who manage their day to day. We ensure that remote employees are issued T4s and T2200s and keep employees and contractors alike in compliance by managing expenses and employment contracts.
If you’d like to learn more about how working with a PEO like Canadian Payroll Services makes remote work and taxes easier, contact us today!