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 non-resident 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 Treaty-Based Waiver and an Income and Expense waiver.