Canadian Payroll Reporter

CANADIAN PAYROLL REPORTER Meeting an expat's pay expectations Salary, premiums, allowances and incentives should be considered | BY ZACHARY PEDERSEN | ASKING AN EMPLOYEE to move to another country for business purposes can be a wise — albeit potentially costly — request. It is important to be clear about the nature of the assignment upfront with the employee, says Ronny Aoun, an associate partner with Aon Hewitt in Toronto. "Key factors to consider when determining an expatriate's base salary are the nature of the assignment, the duration of such assignment… and, most importantly, the intention in terms of employment continuity at the end of the foreign assignment," he says. Expatriates already working outside of Canada are also often asked to move to another country, which can complicate matters, Aoun says. Multi-jurisdictional income and differing social security taxes can have a significant impact on an expatriate's net disposable income. "An expatriate compensation package normally consists of a base salary, short- and long-term incentives, assignment special premiums, several allowances and benefits," he says. "Tax responsibilities and liabilities should be clarified by the employer prior to the foreign assignment." Tax considerations There are two very important tax considerations that have to be looked at from the outset, according to Arun Nagratha, a chartered accountant with Trowbridge Professional in Toronto. The first thing an organization should consider is whether or not the individual can become a non-resident for tax purposes. "The reason that's important is because if they continue to be seen as tax residents of Canada, then they would be subject to tax on their worldwide income, less any foreign tax credits for any income subject to tax abroad," he says. "Now, if they sever tax residency, then they could "If they sever tax residency, then they could be seen as non-residents and then only be subject to tax in the jurisdiction that they're going to." be seen as non-residents and then only be subject to tax in the jurisdiction that they're going to." To make things easier for clients to understand, Nagratha likes to use a practical example. If an employee is based in Toronto and earns $100, her effective tax rate may be $30, he says. If that same employee is asked to move to Hong Kong, the effective tax rate in that location may only equal $10. "If you sever residency, then Canada's not going to tax you on the $100 and Hong Kong's just going to tax you on the $100," he says. "You're only going to pay $10 of income tax." If the employee maintains tax residency with Canada, she will continue to pay a total of $30 in taxes, but $10 will go to the government in Hong Kong and the remaining $20 will be paid to the Canadian government. "You'd only be taxed on the differential of $20 in Canada," he says. "If you think of it like a pie, when you maintain residency that pie stays the same meaning you're paying the tax of the higher of the two countries, but Canadian HR Reporter, a Thomson Reuters business 2013 continued on page 5 3

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