Since the development of the internet, the way employees work and where they work has been slowly changing. In early 2020, the ability to work from home became an overnight necessity due to the global pandemic. Emerging from the pandemic, many employers and employees continued to embrace work-from-home arrangements on a permanent basis.

There was a recent shift in the Canada Revenue Agency’s (“CRA”) interpretation of the province of employment rules that determine the payroll withholding tax applicable to employees who participate in full-time work-from-home arrangements. There are similar province of employment rules under the pension minimum standards legislation; however, there is no regulatory guidance on how to interpret those rules in the context of a full-time work-from-home arrangement.

The purpose of this article is to explore these province of employment rules and consider how those rules might impact pension plans.

Tax: Province of Employment

Under the Income Tax Act (Canada) (“ITA”),¹ employers are required to deduct payroll withholding tax at source and remit those amounts to the CRA.² The province or territory where an employee “reports for work” will determine the rate of provincial or territorial income tax required to be deducted from that employee’s salary, wages, and other remuneration.³ 

An employee is not required to physically perform their duties at the employer’s place of business on a daily basis for that employee to be considered to “report for work” at that location. In fact, for hybrid employees (i.e., employees who have a part-time work-from-home arrangement with their employer), so long as that employee physically performs their normal workload on a recurring basis at the establishment of the employer, that employee will generally be considered to “report for work” in the province where the employer’s establishment is located.⁴

However, employees who are fully remote (i.e., employees who do not physically report for work at their employer’s establishment) are deemed under the legislation to “report for work” in the province from where the employee’s salary or wages are paid (normally, the province where the payroll department or payroll records are located) (the “Deeming Rule”).⁵ 

Prior Guidance

When many employees converted to a full-time remote work arrangement post-pandemic, the CRA confirmed that the Deeming Rule would continue to apply to those employees (the “Prior Guidance”).⁶ The implication of the Deeming Rule is that these full-time remote employees may have experienced a change (i.e., an increase or a decrease) in the provincial or territorial payroll withholding tax if the province where the payroll department is located is different from the province where the employee previously (i.e., pre-pandemic) physically reported for work.

New Policy

Effective January 1, 2024, the CRA released a new policy that now limits the application of the Deeming Rule (the “New Policy”).⁷ The New Policy provides that an employee will be considered to “report for work” at an establishment of the employer if: (i) there is a “full-time remote work agreement”; and (ii) the employee can reasonably be considered “attached to an establishment of the employer”. 

A “full-time remote work agreement” can be temporary or permanent, and it exists where: (i) the employer directs or allows the employee to perform their employment duties fully remote; and (ii) the employment duties are performed at one or more locations that are not establishments of the employer.

The primary indicator to determine if an employee can reasonably be considered “attached to an establishment of the employer” is whether the employee would physically come to work to carry out the functions related to their employment duties at that establishment if it was not for the “full-time remote work agreement”. Thus, for employees who physically reported to an establishment of the employer immediately before entering a full-time remote work agreement, that establishment is the one to which they would be reasonably considered to be attached, unless the employee's circumstances or the nature of their duties have changed.⁸ 

The New Policy is a departure from the Prior Guidance. As a result, for those employees who converted to a full-time remote work arrangement post-pandemic or who will convert to that arrangement in the future, the New Policy will likely mean the Deeming Rule will not apply. Instead, that employee’s province of employment will remain the province where they previously reported for work prior to the pandemic.

Pension: Province of Employment

Comparable province of employment rules exist under the provincial pension minimum standards legislation.⁹ 

For instance, the Pension Benefits Act (Ontario)¹⁰ (“PBA”) applies to every registered pension plan that is provided for individuals employed in Ontario.¹¹ Under the PBA, an individual is deemed to be employed in the province where that employee is required to “report for work” at their employer’s establishment.¹² Where an individual is not required to “report for work” at an establishment of the employer (such as where that individual has a full-time work-from-home arrangement), the PBA deems the individual to be subject to the pension minimum standards legislation of the province of the employer’s payroll department.¹³

Unlike the payroll withholding rules described above, there is no guidance issued from the Ontario pension regulator on the application of the province of employment rules. However, it is generally understood in the industry that the province of employment rules under provincial pension minimum standards legislation are interpreted in a similar manner as the payroll withholding rules under the Prior Guidance. 

The impact of following a Prior Guidance interpretation for pension minimum standards is that there is a risk that the pension benefits of a member who previously physically reported for work at an establishment of the employer will become subject to a different pension minimum standards jurisdiction if the payroll department is in a different province.

A change in pension minimum standards jurisdiction could have a significant impact on an employee’s pension entitlements. For instance, depending on which jurisdiction applies, an employee may gain or lose grow-in benefit entitlements, an employee’s common-law partner may gain or lose spousal status, and the part-time employee eligibility requirements may vary. 

Additionally, a change in the provincial pension minimum standards applicable to the member’s benefits could also switch the major authority¹⁴ for the registered pension plan if the plurality of active members shifts to another jurisdiction. 

Further, because the interpretation under the New Policy does not apply to pension minimum standards, there could be a mismatch between the province of employment under the pension minimum standards legislation and the province of employment for payroll withholding, which could result in additional administrative costs as well as confusion for plan members.

Employers offering full-time work-from-home arrangements will want to be aware of these issues and any possible adverse impacts that the arrangement could have on a registered pension plan.

Conclusion

It is not known whether a similar interpretation to the New Policy will eventually be adopted by the pension regulators to align the province of employment rules under the provincial pension minimum standards legislation with the province of employment rules for payroll withholding tax. As such, unless the legislation is amended or clarified by regulator guidance, employers offering full-time work-from-home arrangements should carefully consider the possible impacts that arrangement could have on a registered pension plan.

1     RSC 1985, c 1 (5th Supp).

2     Paragraph 153(1)(a) of the ITA.

3     Subsection 102(1) of the Income Tax Regulations (Canada), CRC c 945 (“Regulations”).

4     CRA View, 2015-0620821I7, Withholding of Income Tax at Source.

5     Subsection 100(4) of the Regulations.

6     CRA View, 2021-0911861C6, CTF Conference Roundtable 2021 – Q10: Regulation 100(4)(a) and Payroll Deductions.

7     Government of Canada, “Determine the Province of Employment (POE)”, online: Determine the province of employment (POE) - Canada.ca.\

8     For completeness, please note that there are also various secondary indicators that the CRA considers for this portion of the test, but these secondary indicators will not be discussed in this article.

9     The federal Pension Benefits Standards Act, 1985, RSC 1985, c 32 (2nd Supp) is different as it has an “included employment” definition that does not require an employee to physically report for work at an establishment of the employer for the legislation to apply.

10     RSO 1990, c P.8.

11     Section 3 of the PBA.

12     Subsection 4(1) of the PBA.

13     Subsection 4(2) of the PBA.

14     See “Part II Major Authority” of the 2023 Agreement Amending the 2020 Agreement Respecting Multi-Jurisdictional Pension Plans.

Jenifer Elmy, Senior Associate, Torys LLP

Jenifer Elmy is a Senior Associate at Torys LLP. Jenifer maintains a broad practice advising employers, plan administrators, and service providers on all aspects of pension, benefit, and executive compensation plans.