Regulation 105 to Paragraph 153(1)(g) of the Income Tax Act (Canada) requires a Canadian customer of a non-resident of Canada to withhold 15% of the amount invoiced by the nonresident for the latter's services rendered in Canada.
The Canadian customer must remit such withheld amount to the Canada Revenue Agency (the "CRA"), for the non-resident's behalf, by the 15th day of the month following the month in which the Canadian customer paid the non-resident for its services. The purpose of Regulation 105 is to provide the Canadian tax authority with security for tax that may be owing by the non-resident.
Regulation 105 applies to services including consulting services, training services, installation services, IT services, etc. that are physically performed in Canada. Regulation 105 includes service providers such as non-resident individuals, corporations, trusts and non-Canadian partnership.
If the non-resident carries on business in Canada, the non-resident is required to file a Canadian income tax return and these withholdings are recorded as a tax instalment on the tax return. In other words, the 15% withholding is not necessarily the final amount of Canadian income tax that the non-resident owes to the Canadian tax authority — the withheld and remitted amount is considered as an advance payment toward the final amount of income tax which is due.
The non-resident should file a Canadian tax return and calculate the final amount of income tax that the non-resident owes to the Canadian tax authority or alternatively the amount that the taxing authority owes to the non-resident. In other words, as part of this tax return, the non-resident can claim a refund of any excess Regulation 105 withholding amounts, as applicable.
The Canadian customer is required to complete a CRA Form T4- NR slip for each non-resident that it paid showing the gross amount paid to the non-resident during the year and the Regulation 105 taxes withheld, and provide each non-resident with the appropriate slip copies.
To avoid Regulation 105 withholdings by Canadian customers, the non-resident can apply for a waiver or reduction of withholding from the CRA, if the non-resident is eligible therefore. There are two types of Regulation 105 waivers, namely a TreatyBased Waiver and an Income and Expense waiver.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.