Canada-sourced income is taxable in Canada, irrespective of whether the company or individual fulfills the ‘resident’ requirement or not, and in order to prevent non-residents who perform services in Canada from avoiding paying Canadian income taxes on the services income earned in Canada during their temporary stay, the Canadian government requires the payer to withhold taxes on behalf of the recipient under Income Tax Regulation 105.
It is important for Canadian and foreign companies in Canada using non-resident services to be aware of this regulation and to comply with it to avoid any penalties that may be imposed by the Canada Revenue Agency (CRA). AG Tax analysts have prepared a brief overview of Regulation 105, waiver policy and the penalties in case of non-compliance.
Regulation 105 & 108 of the Canadian Income Tax Act
According to Reg. 105 of the ITA, any Canadian or non-resident individual or corporation paying a non-resident individual or corporation for services rendered in Canada is required to withhold 15% of the fee, commission or any other form of payment as income taxes, and under ITA Reg. 108, the 15% withheld is to be remitted to the Canada Revenue Agency by 15th of the next month (the month following the month in which the payment was made).
Not only the income but any out-of-pocket expenses that do not arise from actual expense receipts will still require withholding.
Along with withholding 15% for taxes, the payer is required to complete ‘T4A-NR: Statement of Fees, Commissions, or Other Amounts Paid to Non-Residents for Services Rendered in Canada’ and send it to the CRA by the last day of February of the year following the year in which the income was paid with a T4A-NR Summary. The recipient of this payment must also be provided with copies of the ‘T4A-NR’ and any other slips associated with the income, deductions, allowances, and etc.
The only way one can avoid this withholding requirement is by obtaining a waiver/written notification from the CRA. However, if the payment is in the form of remuneration, salary, or wages (where regulation 102 withholding may apply instead), or if the payment is made to registered non-resident insurers, or authorized foreign banks supporting/easing Canadian banking business, there is no withholding required under Regulation 105.
Waiver of Regulation 105 and Regulation 108
In cases, where the non-resident recipient can prove that the withholding tax is in excess of the actual tax liability which would be due, the CRA may reduce or waive the withholding requirement as ‘undue hardship’ under subsection 153(1.1) of the Act, through the income expense method, or if Canada has an existing tax-treaty with the non-resident person/corporation’s home country, covering these regulations and waiver from it.
- Income & Expenses Waiver Method
Under the income and expense waiver method, net income is subjected to tax withholding at graduated rates rather than the statutory 15% withholding on gross revenue. CRA will consider if the expenses are reasonably claimed, and determine whether the non-resident qualifies for a reduction of withholding thereafter authorizing the payer to reduce the amount withheld under Regulation 105.
- Waiver Through An Existing Tax-Treaty
Generally, a treaty-based waiver can be obtained if the applicant (individual or corporation) can establish their residency in a treaty country and their entitlement to treaty benefits, and meets one of the following tests:
- The non-resident individual earns less than Canadian $5,000 CAD (including any reimbursed expenses) for the tax year;
- If the non-resident individual or corporation is present in Canada for less than 180 days for the existing project, and existence in Canada is not on a recurring basis; or
- If the presence is recurring, the total number of days within the period should be less than 240 days in the current calendar year as well as the three immediately preceding calendar years and the three immediately following calendar years, and less than 180 days during the existing project.
Even if one of the above tests are met, there are certain specific circumstances where a treaty-based waiver may not be allowed. For example residents of countries whose treaty with Canada specifies a deemed permanent establishment in Canada; or a U.S. artist, athlete or any performer earning $15,000 CAD or more; or residents of a treaty-based country offering multi-year engagements under a single contract; or recurring services such as airshow participants, rodeo riders, combine harvesting etc. in the same or similar locations in two or more previous calendar years.
It is best to consult a tax professional if you are a non-resident individual or company offering services in Canada or any person (including entities) based in Canada paying for non-resident services in Canada.
Waiver Application, Form R105
Full, or Partial waiver should be applied in advance with the CRA by filing Form R105 (Form R107, for services that relate to the film industry), wherein the payer needs to provide details and facts related to whether it is an arm’s length transaction; the total amount of fees to be paid (and any potential bonuses); types of equipment the payee will be bringing into Canada (and the rental amount paid); the possibility of contract renewal; etc. Waiver applications should be submitted at least 30 days before either the non-resident services begin in Canada or the initial payment.
Penalties in case of Non-Compliance
If the corporation or individual hiring and paying for the non-resident services fails to withhold and remit the required 15% withholding under regulations 105 and 108, without any existing notification or waiver authorized by the CRA, they may be liable to an assessment of the outstanding amount equal to 10% of the amount not withheld or 20% if the withholding was knowingly avoided along with additional penalties and interest.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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