Regulation 105 - Withholding tax rules for US and other foreign residents providing services in Canada

Non-Residents Providing Services in Canada - Tax Implications (Regulation 105)

Contact Jonathan Levy at jlevy@uhyvictor.com tel: (514) 282-1836 #275 for assistance with your Regulation 105 issues.

We have expertise in filing requirements, applying for waivers and filing corporate and personal income tax returns to recoup Regulation 105 withholdings.

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Click here to download our 2014 Canada US Tax Survival Guide.

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Regulation 105 - Withholding Taxes

Regulation 105 of the Canadian Income Tax Act imposes a 15% withholding tax on fees, commissions or other amounts earned from services rendered in Canada by non-resident individuals and corporations. If these services are rendered in the province of Quebec, they will be subject to an additional Quebec withholding of 9%.

These amounts must be withheld by the Canadian payor even if the non-resident providing the services has no permanent establishment in Canada.

However even if the non-resident has no permanent establishment in Canada, these withholding taxes can be recouped. The non-resident entity must file a Canadian (and Quebec) tax return at the end of the non-resident’s fiscal year and claim a refund to the extent permitted on those tax returns.

Purchasers of services from non-residents are relieved from the obligation to withhold taxes only if the non-resident obtains a waiver from the CRA and the MRQ, where applicable.

The withholding tax on services is called Regulation 105 withholding. It applies to services only and NOT to the sale of goods (in bundled contracts) or the reimbursement of expenses where no profit is earned.

Penalties for not withholding can be high – 10% of the tax (and 20% in cases of gross negligence).

Non-residents have to apply to CRA for a business number (BN) and they should receive a tax slip (T4A NR) from each of their Canadian customers showing the gross amounts paid and the taxes withheld on a calendar year basis. The filing deadline for a T4A NR is February 28 of the year following to the payment(s).


Regulation 105 - Waivers

The 15% withholding is not the final tax of the non-resident. CRA considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.

Where a non-resident can demonstrate that the withholding is higher than their potential tax liability in Canada, either due to treaty protection or income and expenses, the CRA may reduce or waive the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the CRA tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.

Waivers from withholding taxes can be applied for by the non-resident. These waivers can be one of two types:

1. Treaty-Based Waiver – complete exemption

2. Income and Expense Waiver – exemption to withhold on the basis of income net of expenses and at normal income tax rates.

The non-resident must provide a letter from Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.

Form: Regulation 105 Waiver Application Form

Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.

Regulation 105 - Tax Filing Obligations of the Non-Resident

Every non-resident providing services in Canada must file a Canadian tax return (and Quebec tax return where applicable) and report the income that it earned in Canada. This obligation is the same whether or not the non-resident has or is deemed to have a PE.

If the non-resident is an individual and has or is deemed to have a PE in Canada, then they will pay income taxes based on graduated tax rates without entitlement to any personal exemptions.

Corporations pay part I tax (29% to 35%, depending on the province in which they operate) as well as a branch tax (5% for US corporations), with an exemption on the first $500,000 of business profits.

Individuals have filing deadlines of June 15 of the following calendar year. Corporations have to file within 6 months after their year-end.

Regulation 105 withholding can be refunded by completing a Canadian tax return. The refunds could be received more than 18 months after the taxes are withheld. These taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.

Regulation 105 - Goods and Services tax (GST)

GST and its provincial counterparts, HST & QST, have to be charged on supplies (goods and services) made in Canada.

Non-residents have to register for GST if they have a PE in Canada.

PE definition for GST purposes is broader than for income tax purposes - the only criterion which must be met for PE to exist for GST purposes is the existence of a fixed place of business like an office or a workshop.

Note that non-residents can voluntarily register for GST if they don’t have a PE in Canada. Registration for GST will entitle the non-resident to claim a refund on GST it incurs in its commercial activities in Canada. In this case, CRA requires the non-resident to post security. The security is waived if the non-resident’s taxable supplies in Canada do not exceed $100,000 annually and whose annual net tax is between $3,000 payable and $3,000 recoverable.

Regulation 105 - Permanent Establishment

Non-residents who provide services through a permanent establishment in Canada must file Canadian income tax returns. They must report and pay Canadian income taxes on the income they generate from the services provided.

Americans must refer to Article V of the US Canadian tax treaty for the definition of permanent establishment:

  • A fixed place through which business is carried on;
  • A person acting as an agent, other than an independent agent, who has the authority to conclude contracts;

Note that an independent agent who is acting in the ordinary course of his business does not create a PE;

PE specifically excludes a fixed place of business used solely for:

- Storage, display or delivery of goods

- Purchase of goods; and

- Advertising or supply of information or scientific research.


Regulation 105 - The US-Canada Tax Treaty and the Fifth Protocol

Changes to the rules on the taxation of services rendered by a US non-resident came into effect on January 1, 2010.

Article XIV was eliminated and new deeming rules were introduced and inserted at the end of Article V of the Treaty (paragraphs V(9)(a) & (b)).

The rules now state that if PE does not in fact exist based on the existing rules, then it will be deemed to exist if:


9(a) The Single individual Test (for Individuals)
Services are performed by an individual who is present in the other Contracting State for more than 183 days in a 12-month period and, during this period, more than 50% of the gross active revenues of the enterprise are generated from these services; or

9(b) The Enterprise Test (for Corporations)
Services are provided in the other Contracting State for more than 183 days in a 12-month period with respect to the same or connected project for a customer’s PE in the other Contracting State.

Collective presence of more than one individual providing services during one calendar day will only count for one day of physical presence by an enterprise in the other state.

Regulation 105 - Tips for Non-Residents Providing Services in Canada

Review any on-site installation and training activities in Canada to ensure that appropriate Canadian tax filings and payments are made.

Review and complete the CRA’s checklist (T2 SCH 91 E) to determine PE status in Canada.

If a PE is deemed to exist in Canada consider alternatives for recovering a portion of Regulation 105 withholding tax based on actual income earned on the contract in Canada.

Ensure that contracts with Canadian customers clearly distinguish between services provided in Canada and elsewhere. If the distinction is not clear, the entire contract would be subject to Regulation 105 withholding tax.

Review the obligation to register for GST/HST and QST where applicable.

Given the delay in receiving a refund of Regulation 105 withholding and the fact that the IRS will not grant a foreign tax credit on foreign taxes which should be refunded, the US resident should consider creating a PE in Canada in order to expedite the recovery of its foreign taxes.

Click here to find out more information about the UHY Canada US Tax Team

Sources

Canada-US Income Tax Convention, article VII(1), article V, article XV(2)

Fifth Protocol to the Canada-US Tax Convention article V

Dudney decision 2000 DTC 6169 (F.C.A.)

ITA Regulation 105

CRA Information Circular IC 75-6R2 "Required Withholding from Amounts Paid to Non-Residents Performing Services in Canada"

Quebec TP-1016-V

Interpretation Revenu Quebec ADM. 7-, "Reduction in Source Deductions in Income Tax in Respect of a Payment for Services Rendered in Quebec by a Person Not Resident in Canada".


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