Regulation 105: The 15% Withholding Tax on Non-Resident Services in Canada

Hiring a consultant or contractor from outside Canada to work here? Regulation 105 of the Income Tax Regulations may require you to withhold tax from their payment. Here is what Canadian businesses and non-resident service providers need to know.

What is Regulation 105?

Regulation 105 generally requires a payer to withhold 15% of the gross amount paid to a non-resident for services performed in Canada. The withholding is not necessarily the non-resident’s final Canadian tax liability. It is credited against any tax owing when the non-resident files a Canadian income tax return; an overpayment may be refunded.

When does it apply?

The rule applies to services physically performed in Canada by non-resident service providers, including consultants, trainers and installers. It generally does not apply to:

• the sale of goods without a Canadian service component;

• services performed entirely outside Canada;

• reasonable, separately identified reimbursements for travel, accommodation and meals, subject to the CRA’s requirements.

If a contract covers work performed both inside and outside Canada, the parties should clearly document how the fees are allocated.

What are each party’s obligations?

The payer: Withhold 15% of the applicable gross payment and remit it to the Canada Revenue Agency (CRA) by the 15th day of the following month. The payer must also report the payment on a T4A-NR slip.

The non-resident service provider:

1. Determine which Canadian tax identification number and filing requirements apply to their situation.

2. File a Canadian income tax return, where required, to establish their actual tax liability.

3. Claim the amount withheld as a credit and, if applicable, obtain a refund.

Can the withholding be waived or reduced?

Yes, in some circumstances. A non-resident may apply to the CRA for a waiver based on an applicable tax treaty or a reduction based on estimated Canadian income and expenses. The application should generally reach the CRA at least 30 days before the services begin or before the first payment is made. The payer should continue withholding unless it has the required authorization.

A practical example

A Montréal company hires Martin, a consultant based in France, to provide services in Canada for two weeks. His fee for the Canadian work is $10,000. Unless an applicable waiver or reduction has been authorized, the company withholds $1,500, pays Martin $8,500 and remits the withheld amount to the CRA by the 15th day of the following month.

Before the engagement begins, Martin can ask the CRA to review whether he qualifies for a waiver or reduced withholding. His final Canadian tax position will depend on his circumstances and the applicable tax rules.

Plan for Regulation 105 before making the first payment

Regulation 105 can affect the amount a non-resident contractor receives and the payer’s reporting obligations. Confirm where the work will be performed, identify the portion of the payment subject to withholding and allow time for any waiver application.

What if the person working in Canada is a non-resident employee rather than an independent service provider? Different payroll withholding rules, including Regulation 102, may apply.

Need help assessing your withholding obligations? Contact the Mallette team to discuss your situation.