1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

A Reference Guide for Reference Letters

One of the more confusing issues that employers deal with is what to do in the face a request for a reference letter by a departing employee. While dealing with a reference letter for a stellar employee is easy, the task becomes more difficult when determining what to do with a request for a reference letter from an employee whom the employer was glad to see go or whom the employer was forced to dismiss.

A.  When should a reference letter be provided?

There are two reasons why an employer should think carefully before refusing to provide a letter of reference to a departing employee.

First, a reference letter generally assists a departing employee in finding new employment. As a result, on a practical level it is usually in the best interest of both the employer and the employee for the employer to provide a reference letter.

Second, in Canada the courts impose a duty of good faith and fair dealing in their treatment of departing employees. As part of this duty, employers are expected to be candid, reasonable and honest in dealing with departing employees. Where an employer breaches this duty, the employer may be held liable for damages to the employee that arise as a result of the breach.

One of the obligations that has been identified as part of the duty of good faith and fair dealing is for the employer to provide a letter of reference to a departing employee where there is no legitimate reason for refusing the request. For example, employers have been found to have breached their duties of good faith where the refusal to provide a letter of reference was calculated to purposefully make it harder for an employee to find new employment, to pressure the employee into settling a wrongful dismissal claim or to punish the employee. As a result, an employer must have a legitimate reason for refusing to provide a letter of reference. Where there are no specific performance issues and the employee was not terminated for cause, the safest course is to provide a letter of reference.

As a consequence, the better practice is to only refuse to provide a letter of reference in cases where the employer has a legitimate reason for the refusal, such as where the employee’s performance during employment was unsatisfactory.

B.  What should the reference letter say?

Reference letters can cover the range from a glowing endorsement, to a neutral confirmation of employment to a warning to prospective employers regarding a highly unsuitable employee. In order to know how to approach the reference letter, it is important to know something of potential liabilities.

For the most part the liability that arises out of authoring a reference letter is governed by the law of tort with liability focusing on two primary groups of potential claimants – the former employee and the new employer.

a) Liability Toward the Departing Employee

With respect to the former employee, claims will generally arise as a result of a negative reference letter that damages the former employee’s reputation or interferes with the former employee’s ability to find work and maintain employment. In order for liability to attach, the former employee will have to show that the letter materially affected his or her ability to find work and that the negative reference was either untruthful or misleading in some way. Common examples of such liability include:

  • Liability in defamation for statements made about the employee in a reference letter that are untrue and are damaging to the employee’s reputation;
  • Liability under the principles of interference with contractual relations or inducement of breach of contract where an untrue reference provided by the former employer causes the employee’s current employer to terminate the former employee’s employment. A common example of this would be where a former employer decides to unfairly “blackball” a former employee in a particular industry;
  • Liability in the form of increased exposure to damages in the case of a wrongfully dismissed employee where the employee is unable to find alternative employment as quickly as he or she may have otherwise found alternative employment due to a misleading or untruthful reference; and
  • Liability imposed as a result of a breach of the duty of good faith as a result of the employer providing a misleading or untruthful reference.

b) Liability Toward a Prospective Employer

In contrast to the liabilities that may arise with respect to former employees, the liability that may arise with respect to prospective employers is usually based on reference letters that are unjustifiably positive.

In general terms such liability arises out of the principles of negligent misrepresentation. Liability for negligent misrepresentation can arise where a prospective employer reasonably relies on a misleading positive reference from a former employer in making a hiring decision that goes very badly.

An example of such a situation might be where a former employer who has terminated an employee for theft proceeds to negligently provide a positive reference for the employee to a prospective employer for a position where the employee will be handling large sums of cash in an unsupervised position. Should the employee subsequently steal from his or her new employer, the former employer may be held at least partially liable for the loss.

c) Avoiding Problems

To avoid problems, there are a number of guidelines to follow.

  1. Make sure the information in your reference letters is accurate. Most if not all liability arises out of reference letters that are either misleading or untrue.
  2. Avoid subjective opinions and stick to objective facts.
  3. Do not use reference letters to “punish” a former employee or make it more difficult for the former employee to find alternate employment.
  4. Use caution in drafting negative reference letters. Negative reference letters should be reserved for the clearest of cases involving employee misconduct that is objectively verifiable and well documented. When in doubt, the employer should err on the side of caution and either refuse to provide a reference or in more marginal cases provide a neutral reference that merely provides confirmation of past employment without any comment on the employee’s suitability.

,

A Reference Guide for Reference Letters

Limiting Liability: Incentives and Benefits on Termination of Employment

You’ve terminated an employee without cause, what do you owe them? It may be more than you think.

As a starting position, employees are entitled to compensation for what they would have earned during a reasonable period of notice, unless that right is limited by specific agreement. This includes all elements of an employee’s compensation.

Employment agreements often set an agreed notice period in the event of without-cause termination, limiting the broad and unpredictable common law notice period to some other (presumably shorter) length of time, such as the minimum notice period under employment standards legislation. In any event, if the employer wants to provide payment in lieu of working notice, what must be paid?

Not all of an employee’s compensation is contained in the four corners of the employment agreement. The entitlements under any benefit or incentive plan (such as a bonus, stock option or registered pension plan) need to be accounted for when determining damages arising from termination without cause. For instance, what is the terminated employee’s entitlement to options that vest during the notice period? What about scheduled bonuses? Is an employee entitled to remain a member of the pension plan throughout any notice period?

The answer lies in the text of the relevant agreement, be it a stock option agreement, a particular stock option grant, a bonus plan, a pension plan or some other agreement. Just as with employment agreements, the terms of a benefit or incentive plan can limit an employee’s post-termination entitlement – including restricting participation to periods of active employment – but only to the extent that the plan terms are clear and unambiguous, and are brought to the employee’s attention when they are introduced. The general legal principles are:

  • An employee’s rights and obligations are generally governed by the terms of the agreement.
  • If an employee’s entitlement is limited, but the limiting language is ambiguous, a court will typically resolve the ambiguity in the employee’s favour. This is especially true if the agreement was imposed by the employer without negotiation.
  • If the agreement is unambiguous and clearly states that the employee’s rights are limited in a specific way, including on a dismissal without cause, the agreement should govern, as long as (1) the employee was provided with a copy of the plan and/or advised of the plan language during employment, such as through a benefit booklet; and (2) the plan otherwise complies with employment standards legislation.

So a plan/agreement may rebut the principle that the benefit continues during the common law notice period, as long as it clearly and unambiguously states that any right to participate in the plan ends on the later of (i) the day active employment ends (i.e., does not continue into the notice period); or (ii) the end of the minimum period during which benefits must be continued by legislation (for instance, Ontario’s Employment Standards Act, 2000 requires that employers maintain a terminated employee’s benefits during the statutory notice period).  In that case, the agreement will stand and plan participation will end accordingly. However, if the language of the plan is unclear, the employee will be entitled to any benefit that would have accrued during the notice period.

It is important to keep in mind that the threshold for clarity is high and can be difficult to meet in cases of termination without cause. For example, Canadian courts have, in certain circumstances, decided that the terms “termination for any cause” or “involuntary termination” were not sufficiently clear or unambiguous to prohibit continuation during the reasonable notice period, because it was not clear in the plan whether employment was “terminated” as of the last day of work, or at the end of the common law notice period.

If you are looking for clarity and predictability in settling severance packages, you should set clear and unambiguous parameters on notice periods and post-termination entitlements, not only in your employment agreements, but also in the documents that make up your benefits and incentive programs.

,

Limiting Liability: Incentives and Benefits on Termination of Employment

The Final Word? The Ontario Court of Appeal upholds an astounding 10 years of back pay and employee reinstatement

Readers of this blog may recall reading in 2014 about the Ontario Divisional Court upholding the Ontario Human Rights Tribunal’s order for 10 years of back pay and employee reinstatement.  The decision was reached in the case of Hamilton-Wentworth District School Board v. Fair and can be read about in more detail here:  http://www.employmentandlabour.com/school-board-taught-a-costly-lesson-court-upholds-reinstatement-with-10-years-of-back-pay.

Not surprisingly, the Hamilton-Wentworth District School Board (“the “Board”) decided to appeal the Divisional Court’s decision and late last month, the Ontario Court of Appeal rendered its own decision on the same matter.  In doing so, it agreed with the Divisional Court on virtually every point, thereby upholding the astounding 2013 decision of the Human Rights Tribunal for 10 years of back pay, as well as employee reinstatement a decade after termination.

In summary, Ms. Fair was an employee with the Board who was on disability leave for about 3 years prior to being terminated.  At the time of termination she had sought a return to work but the employer refused to accommodate her into another position.  The standard of review on an appeal such as that before the Court of Appeal is one of “reasonableness” – namely, was the Tribunal’s decision reasonable?  Under that test, the Ontario Court of Appeal unanimously determined that the Human Rights Tribunal’s decision was reasonable with regard to the facts and law before it.

Although no new law was made by the Ontario Court of Appeal, it did reaffirm the law in areas that employers should pay particular heed to.  First, the Court confirmed that in order for an employer to fulfil its duty to accommodate an employee’s disability, the employer may be required in an appropriate case to place the disabled employee into a position for which he or she is qualified but not necessarily the most qualified.  Second, the Court confirmed that the passage of years is not determinative of whether reinstatement is an appropriate remedy; rather, context is key.  In this case, the evidence was that Ms. Fair’s relationship with the Board had not been fractured and the passage of time had not materially affected her capabilities, both of which led to the conclusion that reinstatement after a decade was not unreasonable.

Employers would do well to keep in mind the inherent uncertainties of litigation, the fact that the Human Rights Tribunal can order reinstatement, and the fact that a complaint which moves slowly through the system can ultimately increase the bottom line for an unsuccessful employer.  While not every case should necessarily be settled, Hamilton-Wentworth District School Board v. Fair is a good example of a case which became far more costly to the employer due to the passage of time.

The Ontario Court of Appeal’s decision in Hamilton-Wentworth District School Board v. Fair can be found here:  http://www.ontariocourts.ca/decisions/2016/2016ONCA0421.htm.

,

The Final Word? The Ontario Court of Appeal upholds an astounding 10 years of back pay and employee reinstatement

Join Us for a Legal Update at Dentons’ June 10th employment law seminar in Toronto

Dentons will be providing a complimentary half-day employment law seminar in Toronto on Friday, June 10th.  You are welcome to join us.

Presentations at the seminar will be as follows:

  • Recent OHS Cases of Interest”, presented by Adrian Miedema
  • “Workplace confidential: How to maintain privilege over workplace investigations”, presented by Andy Pushalik and Rahim Punjani
  • “Bill 132: Ontario’s new sexual violence and harassment legislation – what employers need to know”, presented by Sabrina Serino
  • “To compete or not to compete? Tips and traps when drafting restrictive covenants”, presented by Jeff Mitchell and Chelsea Rasmussen
  • “How to support transgender employees”, presented by Anneli LeGault
  • “You tweeted what?!: Tips on effectively managing social media in the workplace”, presented by Matthew Curtis and Saba Zia
  • “Covering your assets: Common employer liabilities and best practices for managing HR risk”, presented by Blair McCreadie and Carmen Francis
  • “Do you sponsor a Group RRSP or defined contribution pension plan? Beware of “estimates” that your provider wants to give your employees”, presented by Mary Picard and Aiwen Xu

Date & Time Friday, June 10, 2016 Registration and breakfast:  8:30-9:00 a.m. Welcome remarks and special guest speaker:  9:00-9:30 a.m. Breakout sessions:  9:45-12:15 p.m. Lunch and special guest speaker:  12:15 p.m.

Location Dentons Canada LLP 77 King Street West 5th Floor Toronto, ON

Click here to RSVP

Contact Please contact toronto.events@dentons.com for any questions.

,

Join Us for a Legal Update at Dentons’ June 10th employment law seminar in Toronto

A Quick Guide to the Taxation of Retiring Allowances

When an employee’s employment is terminated without cause, the employee will typically receive some form of a termination/severance payment. All or part of this termination/severance payment may be considered a “retiring allowance” under the Income Tax Act, providing the employee with additional options in respect of the allocation of the payment.

Whether a payment qualifies as a “retiring allowance” will depend on the reason for the payment. Under the Income Tax Act, a retiring allowance is an amount paid to an employee on or after the date his or her employment terminates for the purpose of recognizing long service, or for the loss of employment. As a result of the definition of “retiring allowance”, a payment made pursuant to the applicable employment standards legislation may or may not qualify as a retiring allowance, depending on the circumstances.

Employees with service prior to 1996 may be able to take advantage of preferential tax treatment by transferring part of their retiring allowance to a registered retirement savings plan (RRSP) or registered pension plan (RPP) regardless of their “contribution room”, up to certain limits.

The portion that can be transferred directly to a RRSP or RPP regardless of the contribution room is commonly referred to as the ‘eligible portion’ of the retiring allowance.

Here is how to calculate the eligible portion of a retiring allowance:

  • $2,000 for each year or part of a year of service before 1996 that the employee or former employee worked for the employer (or a person related to the employer); plus
  • $1,500 for each year or part of a year of service prior to 1989 of that employment in which none of the employer’s contributions to a RPP or deferred profit sharing plan were vested in the employee’s name when the employer paid the retiring allowance.

Eligible portion of a retiring allowance:

The eligible portion of a retiring allowance must be transferred directly into the employee’s RRSP or RPP on a tax-free basis. It is not determined by, nor does it affect, the employee’s regular RRSP contribution room. The direct transfer of the retiring allowance to an RPP may result in a pension adjustment (PA) that will affect the employee’s RRSP deduction limit in subsequent years. Note that an employee cannot transfer any part of an eligible retiring allowance directly to a spousal or common-law partner RRSP.

Ineligible portion of a retiring allowance:

The non-eligible portion of a retiring allowance (i.e. amounts over and above the eligible portion) may also be transferred directly into the employee’s RRSP, or a spousal or common-law partner’s RRSP, if the employee has the available RRSP contribution room. If the transfer is made directly to the RRSP, tax need not be withheld.

Things to keep in mind:

  • Contributions to an employee’s RRSP can only be made until the end of the year in which he or she turns age 71.
  • Employers contributing remuneration directly to an employee’s RRSP on his or her behalf should have reasonable grounds to believe that the employee has sufficient RRSP contribution room and can deduct the contribution for the year.

,

A Quick Guide to the Taxation of Retiring Allowances

The Duty to Provide Reasonable Notice of Termination Cuts Both Ways

It is a relatively little-known fact to non-lawyers that just as employers are required to provide employees with reasonable notice of termination, employees are likewise required to provide employers with reasonable notice of resignation.  A 2016 Ontario Superior Court of Justice case has recently confirmed same.

In the case of Gagnon & Associates Inc. v. Jesso et al., the company sought damages from employee Barry Jesso (“Jesso”) for having resigned his employment without notice.  Jesso had been employed by Gagnon & Associates Inc. (the “Company”) for 10 years and at the time of resignation was responsible for approximately 30% of the Company’s annual HVAC sales.  His colleague Patrice Comeau, also a defendant in the litigation, was responsible for a further 30% of the Company’s annual sales.  In 2006 Jesso and Comeau approached one of the Company’s competitors and entered into an agreement with it to open a satellite office.  It was at that point that they both provided the Company with their notices of resignation.

The court stated that the notice of resignation period required by an employee will be a function of the employee’s position with the employer and the time that it would reasonably take the employer to replace the employee or otherwise take steps to adjust to the loss of the employee.  The court then made a finding on the evidence that although Jesso was not a fiduciary employee, a reasonable notice of resignation period was 2 months given that: (i) Jesso was responsible for a significant percentage of the Company’s sales; (ii) the market for experienced HVAC salespeople was limited and it would likely take approximately 2 months to find a replacement; and (iii) Jesso knew that the Company’s other senior salesperson was resigning on the same day, thereby putting the Company in a very difficult position.

It is important to bear in mind that where an employee has signed a proper employment agreement which sets out a notice of resignation period, the employee will probably be bound by that contractual provision.  Likewise, for employees who work in jurisdictions that have employment standards legislation containing a notice of resignation provision, they may be bound by same.  Finally, there is a long line of separate case-law which confirms that fiduciary employees have obligations to provide reasonable notice of resignation to their employers.  That said, the Gagnon v. Jesso case is a helpful reminder that even when there is no contract, no legislation and no fiduciary relationship, an employee may still owe his or her employer a reasonable notice of resignation period.

The case of Gagnon & Associates Inc. v. Jesso et al. can be found here:  https://www.canlii.org/en/on/onsc/doc/2016/2016onsc209/2016onsc209.html?autocompleteStr=gagnon%20%26%20associates&autocompletePos=3.

,

The Duty to Provide Reasonable Notice of Termination Cuts Both Ways

Watch Out: Ontario Ministry of Labour Inspection Blitzes/Initiatives Are Coming

The Ontario Ministry of Labour recently announced its 2016 and 2017 enforcement blitz and initiative schedule. In an effort to emphasize the importance of protecting workers’ rights and ensuring employer compliance with both the Occupational Health and Safety Act (the “OHSA”) and the Employment Standards Act, 2000 (the “ESA”), the Ministry has prepared a coordinated inspection blitz schedule under the Employment Standards Program and the Occupational Health and Safety Program. The blitzes commence this month and are set to continue until March 2017.

The Employment Standards inspection blitzes will focus on high-risk sectors where there is a history of ESA violations and/or where young workers, vulnerable workers and/or an increasing number of Ontarians are employed. This will include the following sectors: Construction, Food Services, Retail Trade, Professional Services, Services to Buildings and Dwellings, Other Amusement and Recreation Industries, and Personal Care Services.

The OHSA inspection blitzes will focus on sector-specific hazards with the aim of raising awareness and increasing compliance with the OHSA. The provincial OHSA Blitzes will target the Construction, Industrial and Mining Sectors with a focus on: Falls, New and Young Workers, Mobile Cranes and Material Hoisting, and Safe Material Tramming Underground.

In addition to province-wide blitzes, the Ministry will conduct local blitzes in predetermined regions throughout the province targeting specific sectors. For the ESA blitzes this will include the Child Day-Care Services, Manufacturing, Fitness Centres, Tow Truck Companies, and Small Manufacturing sectors; for the OHSA blitzes this will include the Industrial and Construction sectors.

The Ministry will report the results of its inspections shortly after they are completed and will track its findings to ensure improvements in compliance and fewer workplace injuries. The Ministry reports that since 2005, it has recovered over $144 million in wages and other money owed to employees through its inspections, claims and collections and, since 2008, has issued more than one million compliance orders for safety issues across all sectors.

Even if you are not in a targeted sector, be aware that in addition to the 2016/2017 inspection blitzes, the Ministry’s officers will continue to conduct their ongoing enforcement efforts, so they may still show up at your door. As such, all employers, and particularly those in sectors targeted by the 2016/2017 blitzes, should take steps to ensure that their workplaces are compliant with both the ESA and OHSA. The Ministry of Labour’s Inspection Blitzes and Initiatives Announcement and 2016-2017 Schedules can be found here.

,

Watch Out: Ontario Ministry of Labour Inspection Blitzes/Initiatives Are Coming

Ontario Retirement Pension Plan: a guide

Media coverage about the Ontario Retirement Pension Plan (ORPP) has been unrelenting for the past two years. The Ontario government has made many announcements setting out its vision for its new, government-run defined benefit pension plan for Ontario employees which will be similar to the Canada Pension Plan (CPP).

Are you finding it hard to keep track? Here is an up-to-date guide. More details are in the articles listed at the end of this guide.

When is the ORPP coming into effect?

The Ontario government recently changed the effective dates. It’s likely that the following schedule is final.

Employers who had an active registered pension plan on August 11, 2015, are exempt until January 1, 2020. It doesn’t matter if their existing plan does not currently qualify as “comparable” under the ORPP rules. It doesn’t matter if their existing pension plan doesn’t apply to all of their employees. All of those lucky employers have until January 1, 2020 to decide how to react to the ORPP.

All other employers of Ontario workers will be required to start making contributions to the ORPP on the following dates, unless they adopt a “comparable” registered pension plan:

  • January 1, 2018 if more than 50 employees; and
  • January 1, 2019 if 50 or fewer employees.

What types of pension plans will qualify as “comparable”? 

The Ontario government has not budged from its position that group registered retirement savings plans do not qualify as “comparable”. It is now certain that Ontario employers who offer only a Group RRSP, deferred profit sharing plan or other type of non-pension savings plan, will have to either change their plans, or join the ORPP.

See the links at the end of this guide for details of what registered pension plans do qualify as “comparable.” Beware: this is not a simple, blanket exemption. Every registered pension plan will have to be closely examined to ensure that it perfectly complies with the details of what the Ontario government deems to be “comparable”. Does your registered pension plan have a waiting period for plan entry or service caps? Are there classes of employees who are not required to join your plan (e.g. certain fixed-term, contract, call-in or other classes of permitted excluded employees)? If the answer is yes, not all of your employees will be members of a “comparable” plan for ORPP purposes. Those employees will need to join the ORPP, while your other employees will not.

The ORPP Administration Corporation will soon start communicating with employers to confirm their enrolment date in the ORPP, and to verify which employers have “comparable” plans and are therefore exempt.

Is the ORPP now law?                        

Yes. In 2015 a very brief piece of legislation was adopted without many specifics. On April 14, 2016 the Ontario government released Bill 186, the Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), 2016. It is 50 pages of legislative details about the new regime. More details have been promised in regulations that will be released in the summer of 2016.

Will it go away if the Canada Pension Plan is enhanced?

Don’t count on it. Federal, provincial and territorial finance ministers will be meeting in June of 2016 to discuss possible changes to the CPP. It’s a long and uncertain political road to get to an enhanced CPP. It may never happen. Meanwhile, the Premier of Ontario has repeatedly said that the Ontario government is pressing ahead with the ORPP.

What’s new?                                    

The recent introduction of Bill 186 in the Ontario Legislature (on April 14, 2016), with all of its detailed rules about the ORPP, is exciting for lawyers. Details in the Bill include a regime for enforcement, guidelines for the collection of personal information, unsurprising points about the treatment of pensions earned under the ORPP on marriage breakdown, death, and so on. Many of these details are not new, so the Bill is less exciting for employers.

One interesting new detail in the Bill applies to directors of corporations. If they receive a “stipend or remuneration” for their service as a director, they will be subject to the ORPP unless an exemption applies.

Want more information?

Contact any member of the Dentons Canada pension group, or click on the following links:

 

 

,

Ontario Retirement Pension Plan: a guide

Miscarriage is a Disability

In a recent interim decision of the Ontario Human Rights Tribunal, adjudicator Jennifer Scott found that miscarriage could constitute a “disability”.  The door was also left open for employees terminated due to miscarriage to claim discrimination due to sex.

In the case of Mou v. MHPM Project Leaders, Mou was off work for approximately 3 weeks in January 2013 due to injuries sustained from a slip and fall accident.  She subsequently suffered a miscarriage in June of the same year and was off work for 2 days.  Her employment was terminated in February 2014 and Mou alleged that the termination related to her absences from work.  In February of 2016, a hearing took place to determine the threshold issue of whether Mou had established that she suffered from a disability.

The employer argued that in order for an illness or injury to constitute a disability, there must be some aspect of permanence or persistence to the condition.  In short, the employer argued that Mou’s health issues were temporary in nature and that Mou fully recovered from them prior to her termination.  Adjudicator Scott felt otherwise.  In coming to her decision she noted that while normal ailments such as a cold or flu are transitory, a miscarriage is not a common ailment and is not transitory.  In reaching that conclusion, Adjudicator Scott made reference to the fact that Mou continued to feel “significant emotional distress from the miscarriage” to the date of the hearing.

No mention is made in the decision as to whether any expert evidence was adduced by the employer with respect to whether miscarriage is a common ailment and it is suspected that no such evidence was provided.  One wonders whether the decision might have been different if the adjudicator had heard evidence to the effect that at least 1 in every 4 pregnancies is believed to end in miscarriage, or that a majority of women have at least one miscarriage during their childbearing years.  While there is no doubt that miscarriage can lead to emotional distress and even physical problems, it is possible that had this expert evidence been provided, it might have affected the adjudicator’s conclusion that miscarriage is not a common ailment.

Separate and apart from the issue of the miscarriage, it is clear from the decision that Mou’s slip and fall injuries also constituted a disability as they took approximately 3 weeks to heal.  Just as importantly, Adjudicator Scott made note of the fact that the employer invited Mou to apply for short-term disability coverage after her slip and fall, which is presumed to have been an indication that the employer believed her to be disabled.

It is important to note that although the Tribunal concluded that a miscarriage can constitute a disability, there has not yet been a final hearing in this case and no determination has been made as to whether Mou’s disability was a factor in her employer’s decision to terminate employment.

The case of Mou v. MHPM Project Leaders may be found here:  http://www.canlii.org/en/on/onhrt/doc/2016/2016hrto327/2016hrto327.html.

 

,

Miscarriage is a Disability

UPDATE ON THE EXEMPTION FOR NON-RESIDENTS FROM PAYROLL WITHHOLDING

The Canada Revenue Agency (“CRA”) recently introduced a program to ease the administrative burden associated with Canadian withholding on the salary, wages, or other remuneration paid to non-resident employees performing their duties in Canada for a short period of time. These measures aim to remove certain ‘qualifying non-resident employers’ and ‘qualifying non-resident employees’ from the withholding requirements imposed under subsection 153(1) of the Income Tax Act (Canada) (the “Tax Act”). Furthermore, these measures will alleviate the need for qualifying non-resident employees to apply for waivers from withholding (commonly known as regulation 102 waivers).

THE EXISTING EMPLOYEE WITHHOLDING REGIME AND NON-RESIDENTS OF CANADA

The Tax Act imposes employee withholding on non-residents to the extent they perform any employment duties in Canada regardless of whether these non-resident employees will ever have an ultimate tax liability under the Tax Act (for instance where an income tax treaty applies). The Tax Act also imposes penalties for failure to withhold amounts required even where no tax would ultimately be payable. Amounts which are withheld and remitted can only be recovered by the employee if they file a Canadian income tax return.

To deal with such situations where a treaty applies, the CRA allows for employees resident in a country with which Canada has a tax treaty to apply for a regulation 102 waiver which can be presented to the employer in order to waive the withholding requirements. However, the process for obtaining a regulation 102 waiver requires at least thirty days of lead time and is time consuming to complete, making the application impractical in many situations. Moreover, the CRA has imposed its own administrative policies over and above the requirements set out in most treaties, making regulation 102 waivers costly and burdensome to obtain.

THE NEW EXEMPTION

Recognizing that the existing system was impractical for many business travelers, an additional program was announced, allowing “qualifying nonresident employers” to forego Canadian tax withholding on amounts paid to “qualifying non-resident employees”.

A ‘qualifying non-resident employee’ is defined in the Proposed Amendments to mean an employee who (a) is, at that time, resident in a country with which Canada has a tax treaty, (b) not liable to tax under Part I of the Tax Act in respect of the payment because of that treaty, and (c) works in Canada for less than 45 days in the calendar year that includes that time or is present in Canada for less than 90 days in any 12–month period that includes that time.

A ‘qualifying non-resident employer’ is defined in the Proposed Amendments to mean an employer whom, (a) is resident in a country with which Canada has a tax treaty, (b) does not, in the relevant year, carry on business through a permanent establishment in Canada, and (c) is certified by the CRA by making an application in the prescribed form at least 30 days prior to the employee performing the services in Canada.

Because of this arbitrary restriction set out in the Proposed Amendments, there could still be a large number of business travelers who will either be required to apply for a regulation 102 waiver, or be subject to withholding tax and be required to file a return to obtain a refund of the tax pursuant to protections under one of Canada’s tax treaties.

RECORD KEEPING AND REPORTING FOR QUALIFYING NON-RESIDENT EMPLOYERS

It should be noted that even though this process removes the employer from the withholding and remitting requirements for qualifying non-resident employees, certain reporting obligations remain. Qualifying nonresident employers will be required to:

  1. determine whether the employees are resident in a country with which Canada has a tax treaty,
  2. track and record the number of days each employee is either working in Canada or is present in Canada and the income attributable to these days,
  3. complete and file the applicable Canadian income tax returns for the calendar years under certification, and
  4. prepare and file a T4 Summary and Information Return for the employees that are not excluded by proposed subsection 200(1.1) of the Regulations.

Proposed subsection 200(1.1) of the Regulations exempts T4 reporting for amounts that qualify under these new exemptions if the employer, after reasonable inquiry, has no reason to believe that the employee’s total amount of taxable income earned in Canada under Part I of the Act during the calendar year is more than $10,000.

WHAT THIS MEANS FOR NON-CANADIAN BUSINESSES

While these new exemptions do not cover every type of business traveler to Canada, they are very helpful for employers that periodically send employees to Canada for short periods of time. This is especially true in circumstances where business trips are unplanned or occur in a manner that does not allow sufficient time to obtain a regulation 102 waiver. For these non-resident employers, it will certainly be easier to comply with this new program, rather than rushing employees to obtain a regulation 102 waiver or withholding and remitting tax on the employees’ behalf. Once in the program, qualifying non-resident employers should continue to monitor employee travel and require employees that will be working in Canada for more than 45 days or present in Canada for more than 90 days to apply for regulation 102 waivers to ensure no withholding will be required.

We would be pleased to assist should you require assistance in making an application for the new program.

 – –Larry Nevsky, Associate, Dentons Canada LLP, [Toronto].(A modified version of this article originally appeared in CCH Tax Topics, number 2289, January 21, 2016).

,

UPDATE ON THE EXEMPTION FOR NON-RESIDENTS FROM PAYROLL WITHHOLDING