This article provides an overview of Canada’s federal tax regulation concerning withholding tax on payments to non-residents for services rendered in Canada.
Requirement to Withhold
Paragraph 153(1)(a) and Regulation 105 of the Canadian Income Tax Act ("ITA") require withholding to be made on payments to a non-resident of Canada as follows:
- Every person paying to a non-resident person a fee, commission, or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment.
- Subsection (1) does not apply to a payment described in the definition of "remuneration" in subsection 100(1) [of the ITA Regulations].
Accordingly, a 15% withholding tax is imposed on fees paid to a non-resident of Canada for services performed in Canada as an independent contractor or self-employed individual.
Regulation 105 does not apply to payments made to an individual who is an employee of the payer. In such situation, the individual would be receiving "remuneration" from the payer and employment source-deductions would alternatively be imposed instead of the Regulation 105 withholding tax.
Revenue Canada requires that the 15% withholding tax be applied to the gross amount of the fee. No deduction is generally permitted to be taken for expenses that are to be incurred by the non-resident. However, Revenue Canada’s administrative policies do not require the Regulation 105 withholding tax to be imposed in the following situations.
- Reasonable travel expenses . For this purpose, reasonable travel expenses include transportation costs, accommodation, and meals. Such reasonable travel expenses that are directly paid by the payer to the third parties or that are supported by actual receipts are not subject to the 15% withholding tax.
- Meal Allowances . The 15% withholding tax is not imposed on meal allowances provided to the non-resident, if the meal allowance does not exceed $40 per day.
- Services performed outside of Canada . Where services are to be performed both inside Canada and outside of Canada, an allocation of the service fees will be required. The services that are to be performed outside of Canada are not subject to the 15% withholding tax. In reviewing the allocation of the service fees, Revenue Canada will consider such things as the term of the contract, the nature of the services to be provided in the various countries, and the relevance of the particular services to the overall assignment.
The withholding tax will be required in the following situations:
- The payer of the services is not a Canadian resident. The identity of the payer is not a relevant consideration in determining whether the 15% withholding tax is to be imposed. Any individual or corporation that pays a non-resident of Canada to perform services in Canada will be required to withhold the tax.
- The non-resident subcontracts work to Canadian residents. The withholding tax requirement is determined based on the identity of the direct recipient of the service fee. In this case, the service fee is paid to a non-resident of Canada and is subject to the 15% withholding tax. This withholding tax requirement is not reduced even in a situation where the non-resident subsequently pays fees to Canadian residents to perform the work in Canada.
Non-resident tax withheld pursuant to Regulation 105 does not represent the final Canadian tax liability. In a fashion similar to regular employment source deductions, Regulation 105 simply requires withholding of the specified amounts. The withholding tax imposed under Regulation 105 is therefore on account of the non-resident’s ultimate Canadian tax liability.
Since the amount withheld is not a final tax, Revenue Canada may waive or reduce the withholding requirement if the non-resident can demonstrate that the final Canadian tax liability will be less than the 15% withholding tax. A waiver may be granted if the non-resident can first demonstrate that it is a resident of a country that has a tax treaty with Canada, and, secondly, demonstrate that it does not maintain in Canada either a permanent establishment (if the non-resident were a corporation) or a fixed base (if the non-resident were an individual). Alternatively, a waiver may be granted if the anticipated Canadian tax liability applied to the non-resident’s Canadian-source profit were less than 15% of the gross income. In other words, when the 15% withholding tax can be proven to be greater than the ultimate Canadian tax liability, it will be reduced accordingly. This reduction could arise because of various expenses to be claimed by the non-resident or because of a reduced rate of withholding permitted under a treaty.
In order to obtain a reduction of the 15% withholding tax, the non-resident must submit an application to the local Revenue Canada tax services office in the area where the services are to be provided. Where the non-resident is seeking relief under a tax treaty (i.e. that there is no permanent establishment or fixed base), Revenue Canada administrative policy requires that the waiver application be submitted no later than one month before the non-resident commences to perform the services in Canada. Where the waiver application is based on a calculation of the ultimate Canadian tax liability (i.e. based on Canadian profits less expenses at the applicable tax rate), the waiver application must be submitted no later than ten working days before the period of service begins. Revenue Canada may exercise its option not to consider the waiver application if the application is submitted outside of these time periods.
It remains the responsibility of the non-resident to demonstrate to Revenue Canada that the waiver or reduction in the amount required to be withheld under Regulation 105 is justified. If Revenue Canada accepts the application, a certificate will be issued granting a waiver or reduction of amounts otherwise required to be withheld. It is only upon receipt of the Certificate that the payer is permitted to reduce or eliminate the 15% withholding tax. In the absence of a waiver Certificate, the full 15% withholding tax on the gross income earned in Canada by the non-resident must be withheld and remitted to Revenue Canada.
The information typically required to be provided with the waiver application would include any certificate of incorporation and all agreements (i.e. contracts) relating to the services performed in Canada.
Revenue Canada has announced that it is reviewing its administrative policies that pertain to the granting of a waiver certificate for the Regulation 105 withholding taxes. As of September 15, 1999, no new administrative policies have been enacted.
The taxes withheld under Regulation 105 must be remitted to Revenue Canada no later than the 15th day of the month following the month in which payment is made to the non-resident. For example, if the non-resident is paid the service fees at any time during the month of January, the Regulation 105 withholding taxes must be remitted to Revenue Canada by February 15.
A T4A-NR Supplementary slip is used to report all amounts paid in a calendar year to non-resident individuals and corporations for services they perform in Canada that were not performed as employees of the payer. Each payer must provide the T4A-NR Supplementary slip to the non-resident on or before the last day of February following the calendar year in which the amounts were paid.
The T4A-NR Summary reports the total of all amounts reported on the T4A-NR Supplementaries by the payer. Each payer must submit a copy of the T4A-NR Summary together with a copy of all T4A-NR Supplementary slips that were issued to all non-resident service providers to Revenue Canada on or before the last day of February following the calendar year in which the amounts were paid. These returns should be mailed to:
Ottawa Tax Centre
875 Heron Rd.
Ottawa ON K1A 1G9
If the non-resident is actually an employee of the payer, then a T4 Supplementary slip should be issued in the same manner as it would be issued by the payer for any of its other employees who render services in Canada. Appropriate employment reporting should also be done for a non-resident who is employed in the Province of Quebec.
Non-residents who have carried on business in Canada (i.e. as independent contractors or self-employed individuals) or who have been employed in Canada are taxable in Canada on their Canadian-source income. A tax return must be filed in the normal course. Such tax return would be used to calculate the definitive Canadian tax liability. When this definitive tax liability is greater than the amounts actually withheld under Regulation 105, a final payment would be required to be remitted to Revenue Canada by the non-resident. Alternatively, where the tax withheld is greater than the definitive Canadian tax liability, then a refund would be forthcoming from Revenue Canada. In filing the tax return, the individual or corporation could still claim the benefit of a tax treaty to reduce the Canadian tax liability.
Individuals must file a T1 individual tax return by April 30th of the year following the calendar year in which the services were rendered in Canada.
Corporations must file a T2 corporate tax return for each fiscal period in which services were rendered in Canada. The T2 return is required to be filed within six months following the end of a corporation’s fiscal period.
If a payer fails to withhold the Regulation 105 taxes in respect of the amount paid to a non-resident, the payer becomes jointly liable to remit to Revenue Canada the required taxes. However, the payer has a statutory right under the ITA to seek reimbursement from the non-resident for the withholding taxes so remitted. This right by the payer to seek reimbursement would not apply if the payer is obligated to fund out of its own pocket the withholding taxes pursuant to a "gross-up" clause under the terms of the contract with the non-resident.
The payer is also liable for interest arrears arising on the unremitted withholding taxes. The payer will not have a statutory right under the ITA to seek reimbursement from the non-resident in respect of any interest arrears that are imposed. However, depending on the terms of the particular contract, the payer may have a contractual right to seek reimbursement from the non-resident.
The interest arrears are calculated at prescribed rates on the amount of withholding tax that remains to be remitted to Revenue Canada. The prescribed rate is set at the average Canadian T-bill rate plus 4% and is compounded daily.
In addition to the interest arrears, the ITA imposes on the payee a penalty equal to 10% of the withholding tax that is owing.
In certain circumstances, where a payer corporation does not withhold and/or remit the required taxes, the directors of the payer corporation may become jointly liable for the amount of tax.
Late filing penalties will arise for late filing of the T4A-NR forms.
If insufficient tax has been withheld and is subsequently assessed by Revenue Canada, the payer will be liable for the additional amounts. If the amount withheld was in respect of a contract subject to a gross-up clause (i.e. specifying that the payer would bear all the Canadian withholding tax) the additional tax assessed by Revenue Canada cannot be recovered from the non-resident. However, the additional withholding tax resulting from the assessment will increase the gross-up payment under the contract and will thereby increase the tax deductible expense that can be claimed by the payer. On the other hand, if the contract does not have a gross-up clause and the payer is unable to recover from the non-resident any tax subsequently assessed, the additional tax is not a tax deductible expense.
In either case, penalties and interest are not tax deductible.
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The foregoing article is based on material prepared for a Canadian withholding tax manual by David Forster and Daniel Lang of PricewaterhouseCoopers LLP.
David Forster is a Tax Partner in the Toronto office and Canadian Leader of the firm’s broadcasting and entertainment industry tax practice. His clients include many well-known international enterprises. E-mail: firstname.lastname@example.org
Daniel Lang is a Senior Manager in the Toronto broadcasting and entertainment industry tax practice. He has advised on a variety of projects affecting clients in the filmed entertainment, specialty cable and live music businesses. E-mail: email@example.com
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