Section 105 of the Income Tax Regulations — a 15% Withholding Tax
If an individual or corporation has paid or is paying a non-resident fees, commissions, or other amounts, for services performed in Canada, they may be obliged to withhold 15% of the payment as a withholding tax under Section 105 of the Income Tax Regulations. A non-resident includes any individuals, corporations, participants of a joint venture, or members of a partnership. These payments can be for various services such as construction projects, engineering consultancy, legal or accounting services, and more. However, subsection 105(2) of the Income Tax Regulations notes that withholding obligations do not apply where the payment is remuneration to an employee.
The 15% withheld amount must then be remitted to the government by the 15th of the month following the month of payment. Not complying with the tax payment deadline can result in interest and penalties for the Canadian-resident payer.
The 15% withholding tax is not the final tax paid by the non-resident. It is only a payment for part of their tax liability in Canada. The objective of Section 105 of the Income Tax Regulations is to provide security for the tax that a non-resident may owe in the future. The Canada Revenue Agency ("CRA") will later assess the non-resident's taxable Canadian income, if they file a return, which could result in further tax liability or a refund. The Canadian resident payer will also need to provide the non-resident payee with a T4A-NR slip, which sets out the fees, commissions, and other amounts paid to the non-resident for services rendered in Canada.
Procedure to Waive Withholding Tax Requirements
Because non-residents of Canada can provide services from either countries that have a tax treaty in place, or those that don't, the CRA has established two methods to waive or reduce the amount of withheld tax under Regulation 105. Only if one of these waivers is granted can a non-resident who provides services in Canada relieve or reduce the amount withheld by their Canadian customer. This is because the Tax Act creates a need for the Canadian customer to properly withhold even if there is a treaty in place between their country of residence and Canada that exempts them from paying tax in Canada.
To begin the procedure, the non-resident provider of services who will receive a payment from a Canadian resident must file a Form R105 and deliver it to the tax services office 30 days before commencing services in Canada or 30 days before the first payment is made for those services. In this form, the non-resident must demonstrate to the CRA that a reduction or elimination of the 15% withholding amount is justified due to treaty protections or due to the non-resident's estimated income and expenses.
The treaty-based waiver is available to two types of persons:
- Those resident in a country with which Canada has a tax treaty and who do not have a fixed base or permanent establishment in Canada; and
- Those eligible for an exemption based on a provision of a tax treaty.
The income and expense waiver is available to two types of persons:
- Those resident in a country that do not have a tax treaty with Canada; and
- Those who would be denied an exemption or reduction in withholding tax under the treaty-based waiver.
There are also guidelines further explaining the details of what CRA requires for a successful waiver. They can be found in Appendix A and B of the CRA's page on "Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada".
Tax Tips from an Experienced Canadian Tax Lawyer on Section 105 of the Income Tax Regulation
Both the Canadian customer who pays a non-resident and the non-resident supplying services in Canada to a Canadian customer can find themselves with issues regarding Regulation 105. In a recent case, Canada (Attorney General) v. Valero Energy Inc, the Canadian customer was subject to a tax audit because the corporation did not withhold the proper tax amounts under Regulation 105. As a result, they had an unexpected tax liability. Valero argued that it had a legitimate expectation that their obligations under Regulation 105 were waived. The Federal Court of Appeals in this case ultimately ruled that the CRA first has to carry out a tax audit of Valero and secondly has to reassess that Valero had an obligation to withhold amounts related to Regulation 105 obligations before the Court can determine if there was a legitimate expectation to waive their obligations under Regulation 105. Thus, whether there was or was not a legitimate expectation will be determined in a future case.
Another case at the Tax Court of Canada, Big Bad Voodoo Daddy v. Canada, revealed the issues that a non-resident supplying services in Canada can face in trying to waive the 15% withholding tax. Because Big Bad Voodoo Daddy, a U.S.-resident jazz group, did not keep proper documentation for salary expenses, they had trouble waiving their withholding tax. This resulted in litigation to determine whether it could expense certain items in filing an income and expense waiver.
These two cases evidence the complexities of Section 105 of the Income Tax Regulations. Further, the guidelines that detail the criteria for a successful waiver are complicated and require experienced expert tax advice to navigate. If you are in a situation where Regulation 105 withholding tax may be relevant, it is important to set up a plan to navigate this area of law. Please speak to one of our experienced Toronto Tax Lawyers about what your options are to waive the 15% withholding tax or to make sure that you are complying with the regulation.