Published: September 30, 2024
Last Updated: September 30, 2024
Payments made to non-residents for services performed in Canada can carry significant tax consequences for both the payer and the service provider. Specifically, both parties should be mindful of Regulation 105 under the Income Tax Act, which mandates that a portion of the payment must be withheld when non-residents are compensated for services rendered in Canada.
What is regulation 105 of the Income Tax Act
Regulation 105 of the Income Tax Act requires anyone making a payment to a non-resident for services (not related to employment) rendered in Canada to withhold 15% of the payment. If the services are provided in Quebec, an additional 9% withholding tax applies. All withheld amounts must be remitted to the Receiver General of Canada or Revenu Québec by the 15th of the month following the payment. Failure to comply may result in a 10% penalty. The regulation applies to all non-resident individuals, corporations, joint venture participants, or partnership members who provide services within Canada.
It is the payer’s duty to determine if the person being paid is a non-resident and, if so, to withhold the correct amount. Certain indicators may help identify non-residents, such as:
- Payments made to or through a post office box
- Payment requested in a foreign currency
- Services performed by non-resident employees
- A foreign address on the contract or purchase order
If a payer fails to withhold the required amount, the payer will be held liable for the entire withholding amount, along with any interest and penalties. Therefore, if there is uncertainty about the service provider’s residence, it is advisable to withhold the amount as a precaution and to consult with an experienced tax lawyer for clarification.
Types of services covered by regulation 105
Regulation 105 of the Income Tax Act does not apply to the sale of goods. However, any service provided by a non-resident in Canada is subject to withholding. Examples of services that may require Regulation 105 withholding include:
- Construction projects
- Installation projects
- Manufacturing or processing
- Oil and gas operations
- Entertainment
- Athletic events
- Forestry services
- Consulting
- Legal or accounting services
- Engineering
- Lectures, seminars, and conference presentations
Exceptions to Regulation 105 withholding tax
Specifically, Regulation 105 does not apply to remuneration, meaning payments such as salary, wages, commissions, or employment-related benefits are exempt from withholding. The CRA also offers an administrative exception for reasonable travel expenses. This includes reimbursed travel costs up to $45 per day for meals and $100 per day for accommodation, per person. Other exceptions include payments made to non-residents involved in the film and video production industry, as well as GST/HST charged on services. Although these instances are exempt from Regulation 105, other withholding requirements may still apply.
Payments to service providers may also be exempt from Regulation 105 withholding requirements based on tax treaty provisions.
A non-resident service provider or his/her authorized representative (including the payer) can apply to the CRA for a waiver or reduction to avoid or reduce Regulation 105 withholding tax, if the non-resident can demonstrate that the withholding amount exceeds his/her actual tax liability.
There are two types of Regulation 105 waivers: the Treaty-Based Waiver and the Income and Expense Waiver.
- A Treaty-Based Waiver is available to service providers who are residents of a country with a tax treaty with Canada but do not have a permanent establishment in Canada. If the non-resident can show that, based on treaty benefits, the 15% withholding exceeds his/her cash actual tax liability, a waiver may be granted.
- An Income and Expense Waiver applies to residents of countries without a tax treaty with Canada, where their projected income and expenses result in a tax liability lower than the withholding amount.
Waiver applications should be submitted 30 days before services begin in Canada or before the first payment. Applications submitted after this period may still be considered, but the waiver will only apply to payments made after it is issued. Payments made before the waiver is granted remain subject to Regulation 105 withholding.
2024 developments for Regulation 105 withholding
The CRA issued two technical interpretations related to Regulation 105 (CRA Views 2022‑0943241E5 dated April 29, 2024] and 2022‑0943242E5 dated May 28, 2024), reaffirming that fees paid to a non-resident company for services performed in Canada are subject to withholding tax under paragraph 153(1)(g) of the Income Tax Act and Regulation 105.
In CRA View 2022-0943241E5, the CRA clarified that, when calculating the amount subject to withholding, only reimbursements for travel and meal expenses related to services performed in Canada are exempt from Regulation 105 withholding. According to CRA View 2022‑0943242E5, this revised administrative stance will apply to subcontractor fee reimbursements made after September 30, 2024 (instead of June 30, 2024, as previously stated). Furthermore, the CRA confirmed that no penalties, interest, or additional Regulation 105 withholding will be assessed for payments made before October 1, 2024, if the taxpayer relied on CRA View 2008‑0297161E5. For example, if ForeignCo invoices Canco and specifies a CAD$1,000 service fee charged by a Canadian subcontractor as a reimbursable amount, under the new CRA guidance, Canco must withhold CAD $150 under Regulation 105 on the payment to ForeignCo for the subcontractor’s fee. However, if ForeignCo obtains a valid waiver from the CRA, Canco would be exempt from withholding under Regulation 105 for that payment.
Additionally, if the subcontractor providing services in Canada is also a non-resident, ForeignCo must withhold CAD $150 on the payment to the subcontractor unless the subcontractor secures a valid waiver from the CRA, exempting ForeignCo from the withholding requirement under Regulation 105.
Pro tax tips – Non-resident contractors should update their contracts regarding reimbursement fees
Taxpayers who plan to utilize the CRA’s temporary administrative relief from Regulation 105 withholding for payments to non-residents made on or before September 30, 2024, must ensure they satisfy the conditions outlined in the CRA’s 2008 document.
Contracts with non-resident contractors may need to be updated to specify that withholding tax will apply to the reimbursement of subcontractor fees for services carried out in Canada. These agreements should also clearly indicate which party will be responsible for the withholding tax, and it’s highly recommended for a taxpayer to consult with an experienced Canadian tax lawyer to draft any necessary amended wording. Additionally, taxpayers should ensure that non-resident contractors issue invoices that separately detail travel expenses and other disbursements, as well as any portion of fees not related to services provided in Canada, since these amounts are typically exempt from Regulation 105 withholding tax.
FAQ:
What is Regulation 105 of the Income Tax Act?
Regulation 105 of the Canadian Income Tax Regulations refers to withholding tax on payments made to non-residents of Canada for services rendered in Canada. Under this regulation, if a Canadian business pays a non-resident for services performed in Canada, the payer is required to withhold 15% of the payment and remit it to the Canada Revenue Agency (CRA).
Key points about Regulation 105:
- It applies to non-resident individuals or corporations who provide services in Canada.
- The 15% withholding tax is deducted from the payment to the non-resident and is considered an advance on their final Canadian tax liability.
- The withholding is not a final tax but rather a prepayment; the non-resident can file a Canadian tax return to determine their actual tax liability, which could result in a refund or additional tax owed.
Exemptions or waivers may be available under certain circumstances, but these typically require the non-resident to apply for a waiver before the services are performed.
Can a taxpayer be exempt from Regulation 105 of the Income Tax Act?
Yes, there are some exceptions and waivers available under Regulation 105 of the Income Tax Act. Non-residents can apply for exemptions or reduced withholding in certain circumstances.
Here are some key exceptions and waivers:
- Waiver Requests
Non-residents can apply for a waiver or reduction of the 15% withholding if they can demonstrate that their tax liability in Canada will be lower than the amount withheld. There are two common types of waivers:
- Section 105 Waiver: This can reduce or eliminate the withholding amount if the non-resident can prove that the withholding is more than the tax liability.
- Tax Treaty Exemptions
Canada has tax treaties with many countries to prevent double taxation. If the non-resident service provider is from a country that has a tax treaty with Canada, they may be eligible for a reduced withholding or a complete exemption from Regulation 105 withholding. For example:
- A non-resident may be exempt if they are in Canada for a limited time (e.g., less than 183 days) and meet the criteria outlined in the relevant treaty.
- Certain types of income or services may be exempt under treaty provisions, but these must be confirmed case by case.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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