New payroll deduction policies for remote work in Canada

On January 1, new Canada Revenue Agency and Revenue Quebec policies for determining the “province of employment” for provincial income tax deductions purposes came into effect. 

The Canada Revenue Agency (CRA) and Revenue Quebec (RQ) have acknowledged that the previous rules for determining an employee’s province of employment (POE) were outdated. These new policies for provincial income tax deductions (POE policies) are the CRA's and RQ’s attempt to align the POE rules with the remote work paradigm of the post-COVID workplace. While the POE policies provide guidance on how the CRA and RQ will now determine the POE, it is important to note no legislative changes to the laws governing payroll deductions and determining the POE have been introduced so far, either at the federal or Quebec level.

Generally, the federal and provincial laws governing determining the POE for payroll deductions purposes provide that the POE is the province in which the establishment to which the employee reports for work is located or, if the employee does not report for work at any establishment, the province from which the employee is paid.

As expanded upon below, the new POE policies provide that if the employer and employee have entered into a “full-time remote work agreement” and the employee can reasonably be considered attached to an employer's establishment, the CRA and RQ will now consider that the employee reports for work at the employer’s establishment to which he/she is “attached.” 

Therefore, as a result of the new POE policies, CRA and RQ may determine that an employee reports for work at an employer’s establishment and apply payroll deductions rates of the province where the establishment is located, despite the employee being fully remote and being paid from an establishment located in another province.

Employers should review their payroll policies to determine whether the POE policies impact the provincial payroll tax rates and the taxes they are required to deduct from employees' salary or wages. 

Remote work agreements and POE

The threshold question for applying the POE policies is whether there is a “full-time remote work agreement” in place between the employer and the employee. A full-time remote work agreement means an agreement that allows or directs the employee to work from a place other than the employer’s establishment full time (100%), regardless of whether the agreement is temporary or permanent. A full-time remote work agreement does not need to be in writing. However, best practice is to have a written agreement for evidentiary purposes. 

If there is a full-time remote work agreement in place, the relevant POE is based on the province of the employer’s establishment to which the employee can reasonably be considered to be attached. Whether the employee is attached to a particular employer establishment depends on many factors, such as the following: 

• Whether the employee was required to report physically to the employer establishment immediately prior to entering the remote work agreement. 
• The establishment where the employee attends or would attend in-person meetings, through any type of communication.
• The establishment where the employee receives or would receive work-related material or equipment or associated instructions and assistance.
• The establishment where the employee comes or would come in person to receive instructions from the employer regarding his or her duties, through any type of communication.
• The establishment that is responsible for or supervises the employee, as indicated in the contractual agreements between the employer and the employee.
• The establishment to which the employee would report based on the nature of the duties performed by the employee.

If the employee was previously required to report physically to an employer establishment immediately prior to entering into the remote work agreement and the employee’s circumstances or the nature of his or her duties has not changed from those subsisting immediately prior to entering the remote work agreement, then this factor will be sufficient to find attachment with that establishment. If the employee was not required to report physically to an employer establishment immediately prior to entering the remote work agreement, then all other factors listed above must be considered to determine the POE. 

An employee could reasonably be attached to more than one establishment, for example if the employee reports to a manager based out of a Quebec office but attends meetings physically at an office in British Columbia. In that case, all factors would need to be considered to determine which establishment the employee is more closely attached to. If the employee could not reasonably be considered attached to any employer establishment, then the POE is determined by the province of the employer establishment from which the employee’s payroll is paid in compliance with the federal and provincial rules. 

Key takeaways

Employers should review the POE policies and their payroll practices to determine whether changes are needed to ensure the appropriate POE applies to remote employees. 

Take, for example, an employer that has offices in both Ontario and BC. The Ontario office is the head office and the establishment from which payroll is paid. The employer has an employee in BC who is an IT specialist. The employer and the employee have entered into a full-time remote work agreement. The employee has always worked from home, but goes into the BC office quarterly for meetings, receives her laptop and other home office equipment from the BC office. Her direct supervisor works from the BC office full-time. 

Before the POE policies took effect, the employer would need to withhold payroll deductions at Ontario rates because the employee does not report for work at any employer establishment and payroll is paid from the Ontario office. Under the POE policies, it is likely the employee would reasonably be considered attached the BC office. Payroll deductions would therefore be required at BC rates.