Authors: Caitlin Madden, summer student-at-law, and Desiree Katz
Payments to non-residents for services rendered in Canada can have major tax implications for both the payor and the service provider. In particular, payors and service providers should be aware of Regulation 105 to the Income Tax Act (Canada), which requires a certain amount be withheld from payments made to non-residents in connection with services provided in Canada. It is important for both parties to understand their obligations under Regulation 105 to ensure compliance.
What is Regulation 105?
Regulation 105 under the Income Tax Act (Canada) requires 15% to be withheld from payments made to non-resident service providers for services rendered in Canada. It is the responsibility of both resident and non-resident payors to withhold this amount.
The purpose of this Regulation is to ensure that non-residents providing services in Canada are paying appropriate Canadian taxes. While this amount is not necessarily the final tax amount owed by the non-resident in respect of Canadian tax payable by the non-resident, it acts as an advance payment toward the ultimate amount of income tax due.
Upon assessment of the non-resident’s income tax return, the CRA will (i) determine whether the withholding amount is sufficient, (ii) determine whether there is additional tax owing, or (iii) issue a refund if the withholding amount exceeds their tax liability.
Types of non-resident entities
Regulation 105 applies to all individuals, corporations, participants in joint ventures or members of partnerships who are non-residents of Canada but who are providing services in Canada.
It is the payor’s responsibility to determine whether the person they are paying is a non-resident and to withhold the appropriate amount, if applicable.
The following indicators may suggest to a payor that they are dealing with a non-resident:
- Payments made to, or care of, a post office box
- Payment requested in a foreign currency
- Services provided by non-resident employees
- Foreign address on the contract or purchase order
If a payor fails to withhold the proper amount, they will be held liable for the entire withholding amount along with any interest and additional penalties. For this reason, if the payor is uncertain whether the services are provided by a non-resident, they should withhold from the payment as a precaution.
Types of services
While Regulation 105 does not apply to sales of goods, anything considered to be a “service” is subject to withholding if it is rendered by a non-resident in Canada.
Some examples of services that may be subject to Regulation 105 withholding include:
- Construction projects
- Installation projects
- Manufacturing and/or processing
- Oil and gas operations
- Entertainment
- Athletic events
- Forestry services
- Consulting
- Legal or accounting services
- Engineering
- Lecturing and seminar/conference presentations
Exceptions
There are certain exceptions to Regulation 105 withholding.
Specifically, Regulation 105 does not apply in respect of remuneration – meaning any payments of salary, wages, commissions or benefits in connection with employment are not subject to Regulation 105 withholding.
The CRA also provides an administrative exception for reasonable travel expenses. This includes travel expenses reimbursed to the non-resident for up to $45 per day for meals and $100 per day for accommodation, per person.
Other exceptions include payments made to non-residents in connection with the film and video production industry and GST/HST charged on services.
While the instances mentioned above are exempt from Regulation 105, other withholding requirements may apply.
Waivers
To avoid or reduce Regulation 105 withholding tax, the non-resident service provider or their authorized representative (which can include the payor), may apply for a waiver or reduction of withholding from the CRA. These applications may be granted in cases where the non-resident can demonstrate that the amount to be withheld is in excess of their ultimate tax liability.
There are two types of Regulation 105 waivers, namely the Treaty-Based Waiver and the Income and Expense Waiver.
A Treaty-Based Waiver is available to service providers who are resident in a country that has a tax treaty with Canada but has no permanent establishment in Canada. If the non-resident can prove that, based on entitlement to treaty benefits, the 15% withholding would be more than they are liable for, then a waiver may be granted.
Similarly, an Income and Expense Waiver may be granted to those resident in a country without a tax treaty with Canada where their estimated income and expenses would result in a tax liability that is lower than the required withholding.
Waiver applications are to be submitted 30 days before either the services begin in Canada or the initial payment. Applications submitted after this period may be accepted; however, the waiver will only apply to payments made after the waiver is issued. Payments made to the non-resident prior to the granting of a waiver will continue to be subject to Regulation 105 withholding.
Obligations of the payor and service provider
Every payor, whether a resident or non-resident of Canada, is responsible for withholding, remitting and reporting the appropriate amount of payment for services provided by a non-resident in Canada. This amount must be remitted to the Receiver General no later than the 15th of the month following the month in which the payment was made to the non-resident.
Regardless of whether a waiver or reduction of withholding was issued to the non-resident, the payor must file a T4A-NR Information Return reporting all amounts paid for services. This report must be filed with the CRA by the last day of February in the year following the year in which the amounts were paid, and a copy of this slip must be issued to the service provider.
It is important to note that payors cannot recover the Regulation 105 withholding tax from the CRA; and, in cases of overpayment, the payor must recover it from the service provider as an overpayment on their contract.
Conversely, service providers should be aware that they are responsible for withholding, remitting and reporting all secondary withholding tax amounts with respect to non-resident sub-contractors, regardless of whether they themselves have been granted a waiver.
Service providers are also required to submit either a T1 or T2 Canadian income tax return in order to calculate their tax liability or to obtain a refund. Both payors and service providers should ensure they keep proper documentation for all expenses in case issues surrounding Regulation 105 withholdings arise in the future.
We hope this has provided useful background on Regulation 105 and its requirements. However, determining whether Regulation 105 withholding applies and ensuring you are compliant can be difficult. Should you or your business require guidance relating to Regulation 105 or any other tax obligations, please contact one of our tax advisers who would be more than happy to assist you.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.