According to Section 105 of the Income Tax Regulations (Regulation 105), every person paying at any time in a taxation year, fees commissions or other amounts paid or allocated to a non-resident for services that are provided in Canada, shall deduct a withholding fee of 15% of such payment. This withholding fee shall be deducted from payments made to individuals, corporations, and trusts. Examples are individuals who are self-employed, corporations and participants of a joint venture. Payers are required to find out if the payment is being made to an entity who is not a resident in Canada for services that are rendered in Canada.
As a non-resident, the withholding fee may be applicable to any fees, commissions or amounts paid for the following services (the list is not exhaustive):
- 1. Construction projects
- 2. Installation projects
- 3. Manufacturing and processing
- 4. Engineering
- 5. Consulting
- 6. Entertainment
- 7. Athletic events
- 8. Appearance and endorsement fees usually apply to athletes and artists
- 9. Advance payments for services which are to be performed in Canada by a non-resident
There are some payments made to non-residents of Canada that are not subject to Regulation 105 withholding. For instance, if GST or HST is charged in respect of the service provided in Canada by a non-resident, this is not subject to Regulation 105 withholding. Additionally, if the non-resident received money as reimbursement for meals or other reasonable travel expenses, this is not subject to Regulation 105 withholding. The travel expenses considered in this case are only those that are incurred for transportation, meals, and accommodation. They have to be reported as travel expenses in the T4A-NR slip.
Services performed outside of Canada
If the non-resident is performing part of the services outside of Canada, then a portion of the services rendered will not be subject to Regulation 105 withholding. This portion of services that is to be performed inside and outside Canada needs to be clearly stated in the contract. It is the payer and non-resident’s responsibility to determine the value of the services offered within Canada and what’s to be done outside Canada. If there is no documentation, the Regulation 105 withholding may be applied to the total payments made to the non-resident.
Waivers or reduction of the Regulation 105 withholding
There are situations where the Regulation 105 withholding may be waived or reduced. For instance, if the non-resident can demonstrate that the normally required withholding is more than the ultimate tax liability (taking into account the treaty protection as well as the estimated income and expenses), the CRA may waive or reduce the Regulation 105 withholding. You must apply for the waiver at least 30 days before either the services start in Canada or an initial payment is made. This is adequate time for the TSO to determine whether a waiver or reduction is warranted. Waiver applications must be properly documented. If the waiver is granted once some payments have already been made, it will only apply to the subsequent payments made to the non-resident.