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CRA Provides Temporary Relief from COVID-19 Cross-Border Tax Concerns

May 22, 2020

The COVID-19 crisis has led to travel restrictions that have required many people to work remotely, and sometimes to remain in jurisdictions other than those in which they typically perform their duties. On April 3, 2020, The Organisation for Economic Cooperation and Development (OECD) Secretariat released an analysis of the impact of the COVID-19 crisis on various cross-border tax matters that are the subject of double taxation treaties and urged tax administrations to provide additional guidance.

On May 20, 2020, the Canada Revenue Agency (CRA) has released their Guidance on international income tax issues raised by the COVID-19 crisis (Guidance) with respect to how the CRA will administer a number of the cross-border taxation issues. These have arisen because of individuals who would typically not carry out their duties in Canada now being required to do so as a result of travel restrictions brought about by the COVID-19 crisis. Other tax authorities, including in the United Kingdom and Australia, have previously provided similar guidance. The CRA’s Guidance also addresses COVID-19 related delays in the processing of certain taxpayer applications and requests.

The Guidance specifically notes that it is intended to assist taxpayers during this time of crisis and does not represent broader CRA policy or any change in CRA’s “commitment to combat international tax evasion and avoidance.” It warns that taxpayers engaging in “schemes” that attempt to exploit the crisis or Guidance can expect the CRA to use all tools at its disposal to protect the integrity of the tax system.

With some minor exceptions, the Guidance provides welcome relief from consequences that might otherwise result from strict compliance with rules and procedures that never envisioned the circumstances created by the COVID-19 crisis. The Guidance will apply from March 16, 2020, to June 29, 2020, unless extended.


Canadian residents are generally liable to tax under the Income Tax Act (Canada) (ITA) on their worldwide income, while non-residents are only liable to tax on certain income with a source in Canada. Residence is generally a common law concept, subject to certain rules that may deem persons to be resident in Canada under particular circumstances. Bilateral tax treaties entered into by Canada with other countries often contain “tie-breaker” rules that address cases where a person is considered to be resident in both countries under their domestic laws. The Guidance addresses issues that may be faced by both individuals and corporations as a result of travel restrictions arising during the COVID-19 crisis.


Residence for corporations is determined based on the common law “central management and control” test, which generally looks to the place where the board of directors meets and makes the strategic management decisions about the corporation’s business.

The Guidance acknowledges that, during the COVID-19 crisis, corporations typically resident in foreign jurisdictions may have directors participating in board meetings while physically present in Canada because they are unable to travel to the foreign jurisdictions. The CRA says that, for purposes of determining residence under bilateral tax treaties that rely on the “place of effective management” or other factors to break the dual residence “tie,” Canada will not consider a corporation to become resident in Canada solely because a director must participate in a board meeting from Canada due to travel restrictions.

The Guidance does not address residence determinations more generally, saying only that determinations involving potential dual residency with non-treaty countries will be determined on a case-by-case basis. This is disappointing, as the issue of residence under the common law test is relevant not only for purposes of determining the residence of a corporation that is ordinarily resident in a non-treaty country, but also for purposes of surplus computations under the foreign affiliate rules in the ITA. 


Residence for individuals is also generally a common law determination, based on the residential ties of the individual with Canada. A deeming rule in the ITA also causes an individual who is physically present in Canada for 183 or more days in a tax year to be considered resident in Canada for the year.

The Guidance acknowledges that individuals who were in Canada at the time travel restrictions were imposed may not have been able to leave Canada and return to their countries of residence as intended. The CRA will not consider an individual to be resident in Canada under the common law where they have remained in Canada solely because of travel restrictions. Also, as a temporary administrative concession, the CRA will not consider days during which an individual is present in Canada and unable to return to their country of residence solely because of travel restrictions to count towards the 183-day deemed residency test. This position is contingent upon such individuals returning to their countries of residence as soon as they can.


A non-resident entity that is considered to carry on business in Canada for purposes of the ITA is required to file a tax return for the relevant taxation year and will be subject to Canadian tax on its net income from carrying on business in Canada, subject to any relief available under an applicable tax treaty.

Whether a non-resident is considered to carry on business in Canada for purposes of the ITA is a factual determination based on common law principles. In making such determination, the courts generally look to a number of factors, including where the operations from which revenue is generated take place. The ITA also deems a non-resident to be carrying on business in Canada where it solicits orders or offers anything for sale in Canada through an agent or servant, regardless whether the contract or transaction is to be completed inside or outside Canada.

The Obligation to File a Tax Return

In the Guidance, the CRA maintains that a non-resident entity will be required to file a Canadian tax return if it is considered to be carrying on business in Canada for purposes of the ITA, even if the only reason that is the case is that one or more individuals are present in Canada due to travel restrictions imposed because of COVID-19. This filing requirement applies whether or not the non-resident entity is resident in a jurisdiction with which Canada has a tax treaty.

The Obligation to Pay Tax – Non-Treaty Residents

Where the non-resident entity is not resident in a jurisdiction with which Canada has a tax treaty, the non-resident would be subject to tax on its income from carrying on business in Canada for purposes of the ITA. In the Guidance, the CRA states that if it can be demonstrated by the non-resident entity that it surpassed the carrying on business in Canada threshold solely as a result of the COVID-19 travel restrictions, the CRA will determine on a case-by-case basis whether administrative relief from the obligation to pay Canadian tax would be appropriate

The Obligation to Pay Tax – Treaty-Residents

Even if a non-resident is considered to carry on a business in Canada for purposes of the ITA, such non-resident may still be entitled to a treaty-based exemption from Canadian income tax, provided that the entity does not have a permanent establishment (PE) in Canada, qualifies as a resident of the other jurisdiction with which Canada has entered into the relevant treaty and is entitled to the benefits of such treaty. Although the definition of a PE may differ from treaty-to-treaty, it typically includes the following:

  1. A fixed place of business through which the business is wholly or partly carried on, including a place of management, a branch and an office
  2. A person acting in Canada on behalf of the non-resident—other than an agent of independent status acting in the ordinary course of its business—who has, and habitually exercises in Canada, an authority to conclude contracts in the name of the non-resident

Some tax treaties, including the Canada-U.S. Tax Treaty (U.S. Treaty), also include a “services-based” PE concept. 

The CRA has provided in the Guidance that where a non-resident entity is resident in a jurisdiction with which Canada has a tax treaty, the CRA will not consider the non-resident to have a PE in Canada solely because its employees perform their employment duties in Canada as a result of the travel restrictions brought about by the COVID-19 crisis.
The Guidance also provides that the CRA will not consider a non-resident entity to have a Canadian PE solely due to a dependent agent, such as an employee concluding contracts in Canada on behalf of the non-resident entity, provided that such activities are limited to the period during which COVID-19 travel restrictions are in place and those activities would not have been performed in Canada but for the travel restrictions.
The CRA also states that it will not include any days that an individual was present in Canada because of the COVID-19 crisis in determining whether an individual meets the 183-day presence test in a "services PE" provision of a tax treaty, such as Article V(9)(a) of the U.S. Treaty, provided that such presence in Canada was due solely to COVID-19 travel restrictions.


The Guidance also addresses issues relating to employees who work in a country other than their country of residence and whose mobility has been affected by travel restrictions.

U.S.- and Other Non-Residents Performing Duties in Canada

Some bilateral tax treaties, including the U.S. Treaty, allow Canada to tax the wages and other remuneration of employees whose duties are performed in Canada, provided that, amongst other threshold requirements, the employee is physically present in Canada for more than 183 days in the tax year. The Guidance assures employers and employees that, for employees who are now exercising their duties in Canada for an extended period of time solely as a result of travel restrictions, those days will not be counted toward the 183-day test in the U.S. Treaty and other tax treaties with similar “days of presence” thresholds. As such, these individuals will continue to benefit from treaty relief notwithstanding their extended periods of physical presence.

Canadian Residents

Non-resident employers of Canadian residents are required to deduct withholdings at source from wages they pay, even if the employment duties are performed outside of Canada. In some circumstances, the CRA will issue a “letter of authority” to such an employee to allow the non-resident employer to reduce Canadian withholdings to reflect the foreign tax credit available to the Canadian employee in respect of taxes payable to the foreign country. The Guidance confirms that, where a Canadian-resident employee of a non-resident employer that has been issued such a “letter of authority” for the taxation year that includes the crisis is forced to perform their employment duties in Canada on an exceptional and temporary basis as a result of travel restrictions, the letter of authority will continue to apply and the withholding obligations of the employer will not change in Canada. The Guidance restricts this policy to circumstances where there has been no change to the withholding obligations of the non-resident entity in the other country.


If a payment is made to a non-resident for the provision of services performed in Canada, the payor will generally have an obligation pursuant to Regulation 105 to the ITA (Reg. 105) to withhold 15 per cent of the amount of such fees relating to such services.

A non-resident may make an application to the CRA for a waiver of the Reg. 105 withholding requirement in certain circumstances, such as the non-resident being entitled to an exemption from Canadian tax pursuant to an applicable tax treaty. As a result of the COVID-19 crisis, the processing of such Reg. 105 waiver requests was temporarily interrupted and, although waiver requests are now being processed, the CRA’s ability to process such requests has been and may continue to be delayed.

The Guidance provides that the CRA will accept urgent Reg. 105 waiver requests submitted electronically on a temporary basis. Additionally, where a Reg. 105 waiver request has been submitted to the CRA and, due to the COVID-19 crisis, the CRA was unable to process the request within 30 days, the CRA will not assess a person who fails to deduct, withhold or remit amounts required under Reg. 105 any amount as required by Reg. 105, provided that the sole reason the non-resident could not obtain a Reg. 105 waiver was due to the delay in the CRA being able to process the waiver request because of the COVID-19 crisis. The Guidance states that the person paying the amount must also demonstrate that reasonable steps were taken to ascertain that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty with Canada.


The ITA requires a non-resident vendor who disposes of certain “taxable Canadian property” to notify the CRA before, or within 10 days after, the disposition. Where the notification is provided and the vendor also pays an amount to cover the tax on any gain on the disposition, or provides acceptable security for such tax, the CRA will issue a “Section 116 Certificate.” A purchaser of taxable Canadian property from a non-resident vendor who does not receive a Section 116 Certificate is required to withhold and remit from the purchase price for the property.

Processing of Section 116 Certificates was interrupted during the COVID-19 crisis, and, while processing has resumed, the time to issue a certificate has been delayed. The Guidance provides that urgent requests for “comfort letters” advising purchasers, vendors or their representatives to retain the funds withheld from the purchase price for taxable Canadian property—rather than making a remittance—may be submitted on a temporary basis by contacting the CRA’s individual tax enquiries line at 1-800-959-8281.

For further information, please reach out to a member of our Tax group or your usual Blakes contact at any time.

Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.