By Grant Gilmour
Regulation 105 of the Income Tax Act requires any one who pays fees, commissions or other amounts to a non-resident person (individual or corporation) who has provided services in Canada, to withhold taxes calculated as 15% of the gross amount. This does not include wages. There are other regulations for wages.
Many international businesses are starting to look to Canada to expand or obtain work. As such, the Canada Revenue Agency does not want to lose out on any income generated by these non-residents while conducting business in Canada. Consequently, if these non-residents are contracted to perform work for your company in Canada then you, as payer, have to ensure these withholdings are remitted. Failure to do so will result in penalties and interest. Conducting business with non-residents can result in surprising tax liabilities.
Regulation 105 covers a wide variety of activities such as construction projects, entertainment, athletic events, forestry, consulting, manufacturing and lecturing. The regulation only applies if the work is done in Canada. If your company is purchasing a product made outside of Canada, then no such withholding tax is required. However, if the non resident company sends someone to Canada to make or install the item or provide a service, then any payment made will be subject to the regulation. A different regulation (102) applies if you hire a non-resident to work in Canada as an employee.
There are various exemptions and waivers (usually because of a tax treaty) available from this withholding tax which require an understanding of the business involved and/or the completion of relevant forms. Alternatively, there are some tax planning measures that could be instigated to work around Regulation 105. One thing that makes this Regulation 105 withholding tax a bit of a misunderstood tax is that is often fully refundable to the non-resident business. Whereas if the Canadian business didn’t withhold it the Canadian business is still liable even though it would have been refunded.
If your company has entered into a business arrangement with a non-resident, please contact us at Gilmour Knotts Chartered Accountants to determine if you have any withholding tax issues.