The CRA has extended its 2020 reporting relief for certain Canadian-resident cross-border workers to 2021. The CRA has updated its administrative guidance for affected individuals who performed their employment duties from their home in Canada instead of at the office of their United States employer because of travel restrictions. Specifically, the CRA says that these individuals may file their 2021 Canadian income tax returns as in prior years and claim a foreign tax credit for amounts paid in the United States, or alternatively file in accordance with the income sourcing rules in the Canada-U.S. income tax treaty (i.e., treat the income as sourced from Canada). The CRA also says that where these sourcing rules are relied on, it will again consider interest and penalty relief for the individual's 2021 income tax payment (or instalment payments). Previously, the CRA's reporting relief was only provided for the 2020 tax year.
The CRA issued new filing guidance and extended relief measures for individuals affected by travel restrictions on April 1, 2021. The new guidance provided details for certain Canadian-resident cross-border employees that performed their employment duties from their home in Canada instead of at the office of their United States on how to properly file their 2020 Canadian income tax filings. Specifically, the CRA stated that these individuals may file their 2020 Canadian tax returns as in prior years and claim a foreign tax credit for amounts paid in the United States or file in accordance with the income sourcing rules in the Canada-U.S. income tax treaty, depending on the facts and circumstances. The CRA said that it intended to provide additional guidance for affected individuals and their employers for their 2021 taxation years at a later date.
Canadian cross-border employee relief extended
The CRA now says it will generally extend its 2020 administrative reporting relief for affected Canadian-resident individuals to the 2021 tax year. This applies to Canadian-resident individuals that performed their employment duties from their home in Canada instead of at the office of their United States employer because of the travel restrictions.
Specifically, for affected individuals whose employers have continued to impose withholdings in the 2021 tax year as if the income was earned in the United States, the CRA will again consider the employment income from the United States employer to be sourced from the United States for the 2021 tax year. In this situation, the individuals may file their 2021 Canadian tax returns as in prior years and claim a foreign tax credit for the U.S. taxes withheld. As previously advised, the CRA says that these individuals must maintain records to confirm the amounts paid to the United States, and report income that was not subject to withholding in the United States as if it was sourced in Canada. Further, where these individuals receive refunds of amounts paid to the United States at a later time, they must file an amended return to adjust the amount of the foreign tax credit they claimed in Canada.
Additionally, the CRA will continue to offer administrative relief for affected individuals who choose to file their 2021 Canadian income tax return in accordance with the income sourcing rules in the Canada-U.S. income tax treaty (i.e., report their employment income as sourced in Canada). In this case, the CRA advises affected individuals to treat certain 2021 amounts as follows:
- Income tax paid to the United States — Individuals may claim a foreign tax credit for U.S. taxes paid related to employment income that is taxable in the United States under the Canada-U.S. income tax treaty.
- FICA contributions — Individuals that made valid contributions in 2021 to the United States under the Federal Insurance Contributions Act (FICA) may claim a foreign tax credit in Canada for those contributions. To claim the FICA contributions as a foreign tax credit in Canada, individuals may include the entire amount of the individual's employment income on which the contributions were based in their 2021 foreign non-business income.
- U.S. retirement plan contributions — Individuals must determine the deductible amount as if they continued to exercise their employment duties in the United States throughout all of 2021, and report this amount on Form RC268, "Employee Contributions to a United States Retirement Plan — Cross-Border Commuters".
- State income tax — Individuals that paid state income tax in 2021 may claim a foreign tax credit in Canada for those taxes. For the purpose of claiming the foreign tax credit, the foreign non-business income of the individual consists only of the portion of the employment income that the individual would have earned in the state had they continued to commute to work in the United States in 2021. Individuals that later receive a refund of state tax must file an amended return to adjust their foreign tax credit claim.
Where individuals who file their 2021 Canadian return based on the Canada-U.S. income tax treaty sourcing rules have a higher Canadian tax liability, the CRA advises that it will again consider cancelling interest and penalties that may arise due to late tax payments. The CRA indicates it will grant this relief in these circumstances until the time the individual receives their United States refund and pays it towards their Canadian amount owing within a reasonable time. The CRA says it will also cancel instalment penalties and interest for individuals who are notified that they must remit income tax instalments in 2022 due to this amount.
Individuals can request penalty and interest relief through CRA My Account or by filing Form RC4288, "Request for Taxpayer Relief — Cancel or Waive Penalties and Interest". These individuals must also provide a detailed description of their employment arrangement and provide a copy of their:
- Form W-2
- U.S. 1040 return
- U.S. account transcript, and
- Any other document that confirms the receipt of the U.S. refund.
Individuals should be aware of potential timing issues when filing a CRA relief request. For example, individuals must wait for the IRS to process their U.S. tax filing before they can request a U.S. account transcript, and it may be several more weeks before this transcript is received. As a result, individuals should ensure they file their U.S. tax returns on time. Further, the CRA may take additional time to process RC4288 forms, since it must examine each employment arrangement on a case-by-case basis.
For more information, contact your KPMG adviser.
Information is current to January 10, 2022. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500