The global pandemic has had many more Canadians working remotely over the past two years than ever before. This helped keep workers safe from catching or spreading COVID, it allowed businesses to continue operating when they might otherwise have had to shut down, and it gave employees a new level of work/life balance as they cut out the commute and performed their job duties from home.
The experiment with remote working had numerous benefits for both employees and employers, but it can also impact how you pay your taxes. Several different working situations can affect how you file your tax return.
These include:
- Working remotely for an employer in the same province as you reside
- Working remotely for an employer in a different province
- Working remotely for an employer in another country
Working for an employer in the same province
This is the simplest situation when it comes to filing your annual tax return, and in this case, remote working can create taxation benefits for you.
Under the existing Canadian tax laws, employees are taxed to the province where they reside. Similarly, companies withhold income tax and other deductibles based on the rate determined by the province where they are located. So long as the employee and employer are based in the same province, these amounts match for easy filing.
Also, similar to last year, once again for 2021 there is an available tax credit for Canadian workers who were required to work from home due to COVID-19. This deduction can be claimed on your personal income tax return. Deductions lower the total income you are taxed on, reducing your overall income tax liability.
Who can claim the tax credit?
Employees who are eligible for the remote working credit are those who have worked more than 50 per cent of the time from home for a period of at least four consecutive weeks during the year.
There are two claim methods available:
- Flat rate method – Workers who meet the above criteria can claim $2 for each day they worked from home up to a maximum of $400 per individual in 2020 and $500 per individual in 2021 and 2022.
- Detailed method –For this claim, you should account for your overall home expenses and determine your workspace as a percentage of your total living area to determine your tax credit.
Eligible expenses include utilities (heat, electricity, water, home internet, repairs & maintenance, rent, office supplies paid out of pocket).
For example, if your monthly electricity bill is $100 ($1200 annually) and your home working space represents 10 per cent of your total living area, then you can claim 10 per cent - $120 - of your electricity bill towards your tax credit.
How to claim the credit
Flat Rate method – insert the number of days you worked from home on form T777S of your income tax return up to a maximum of 250 days.
Detailed method – complete the detailed section of Form T777s on your income tax return and ask your employer for a completed T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19.
Find out more about claiming the COVID-19 remote work tax credit on the Government of Canada website.
Working for an employer in another province
As we mentioned above, income taxes withheld by employers and paid by workers are determined based on the provinces in which they are located. When you work for a company based in another province from your primary residence, there can be some complications when filing your income tax return.
Because income tax rates vary between provinces, when your employer withholds the tax base on the rate specified by one province, and the employee is required to pay the rate set by another province, there can be discrepancies. In this case, when it comes time to file your taxes, you will need to pay the amount still owing when your employer has deducted less than the rate of your home province, or you will be entitled to a refund if they have withheld more.
Working remotely for an employer in another country
If you work remotely from your residence in Canada, you are responsible for paying taxes here in Canada. Income tax requirements in this country are based on your residency, regardless of who your employer is or where they are located.
Therefore, your tax rate will be determined by the province that you live in – even if you are a remote worker for an organization located outside of the country.
Employers in other countries who hire employees living in Canada as remote contributors are responsible for the same withholding, remitting, and reporting obligations as employers based within Canada.
They are required to withhold Canadian federal and provincial taxes, Canada Pension Plan contributions, and Employment Insurance premiums based on the employee’s worldwide compensation and must remit these amounts to the Canada Revenue Agency (CRA).
Like for locally-based Canadian companies, these organizations must report the income and deductions for their remote employees in this country on individual and summary T4 slips and file on or before the last day of February following the calendar year. If their employee lives and works in Quebec, there are additional payroll remittance and reporting requirements to Revenue Quebec.
You can find out more about taxation reporting and requirements for Canadian employees working for international companies on the Canadian government's website.
If you are a Canadian resident working freelance for an American company and not as an employee, you will be responsible for reporting your income to the Canadian Revenue Agency. The US company that pays you for your work will issue you a W-2 form that sums up all of your earned income for the year in American dollars (USD).
It is your responsibility to convert that figure into Canadian money (CAD) when you report your earnings to the CRA.
Working from home has become a new normal for many Canadian employees and employers since the outbreak of the COVID-19 pandemic, and it has created numerous advantages for both groups. However, the increase in remote work has created some new tax issues that you should be aware of before you file your next income tax return. You don’t want an oversight to land you on the wrong side of the CRA.
