CROSS BORDER RESOURCES

Regulation 105 - 15% Withholding Tax For Services Rendered in Canada

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Regulation 105: Top Questions Asked by Non-Residents Providing Services in Canada 

What is Regulation 105? 

Regulation 105 is a Canadian tax regulation that applies to Americans and other non-residents rendering services in Canada. This includes consulting services, training services, installation services, etc.

Regulation 105 withholdings generally apply only to services provided in Canada, and not to the sale of goods or the reimbursement of expenses.

If you have a Regulation 105 issue, be aware that you may also have a Regulation 102 (Canadian payroll), GST/HST (Canadian Sales Tax) and/or Canadian Corporate Tax issue.

If you render services in Canada, Regulation 105 requires that your Canadian customers withhold 15% of your invoiced amount, and remit those funds to the Canadian government on your behalf.

If you carry on business in Canada, you are required to file a Canadian income tax return and these withholdings are recorded as a tax instalment on this tax return. If you meet the criteria, you can apply for a refund of the 15% withholdings on the tax return. 

Note that the 15% withholding is not necessarily the final amount of Canadian taxes that you owe – it is considered as an advance payment toward the final amount of taxes which are due. 

You must apply to CRA International Tax Department for a business number (BN) so that Regulation 105 withholdings can be properly allocated and tracked. 

Note that if the services are provided in the province of Quebec, an additional provincial 9% withholding applies.

 

How do you recover amounts withheld under Regulation 105?

If the 15% amount is withheld, you need to file a Canadian tax return to calculate the final amount of tax that you owe or to receive a refund of any excess withholding amounts. You should receive a T4A-NR slip from each of your Canadian customers by Feb. 28 of the following year showing the gross amounts paid to you during the year and the Regulation 105 taxes withheld.

The Canadian tax return filing deadlines are as follows:   

  • Individuals: June 15 of the following calendar year
  • Corporations:  6 months after their year-end

As part of this tax return, you can claim a refund of any excess withholding amounts, if applicable. Note that the CRA imposes penalties if non-resident files a tax return late (even if you are in a refund position). In addition, these taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.

 

How can you avoid Regulation 105 Withholdings?

The best way to avoid a Regulation 105 withholding is to apply for a waiver or reduction of withholding from the Canada Revenue Agency (CRA). There are two types of waivers:

  • Tax Treaty Waiver – these are based on demonstrating that the U.S. provider is not subject to taxes due to certain U.S. Canada Tax Treaty exemptions.
  • Income and Expense Waiver – these are based on demonstrating that the 15% withholdings are excessive.

As part of the application process, the applicant must demonstrate to the CRA that a waiver or reduction of the amount to be withheld is justified. To request a waiver, you need to submit Form R105 (Waiver Application) to the CRA tax services office in the area where the services are to be provided. Waiver applications must 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. 

If services are rendered in Quebec, you can request a waiver or reduction of the Quebec 9% provincial withholding taxes by submitting Form TP-1016-V to Revenue Quebec.

 

What is a Regulation 105 “Bundled Contract”?

A “Bundled Contract” occurs when a contract covers separate goods and services to be provided or includes services rendered partially inside and partially outside of Canada. This “bundled contract” causes issues, because Regulation 105 relates to services rendered in Canada, and the Bundled Contract includes services rendered outside of Canada, and frequently goods that are shipped to Canada.  

The CRA states: 

If an allocation cannot be made and documented, Regulation 105 withholding is recommended on all the payments made to the non-resident in respect of the goods and services provided.

Accordingly, the impact of Regulation 105 can often be reduced significantly by preparing documentation that will be acceptable to the CRA that isolates amounts paid for services exclusively rendered in Canada.  

 

What is a Regulation 105 Multi-tiered Contract?

In completing their work, many non-residents hire other companies and/or individuals to help perform their work in Canada. This often results in the American company hiring other American contractors, Canadian resident contractors, or both. The CRA calls this a Multi-tiered contract because the American company or individual hired to carry out the work in Canada is hiring other American individuals or companies to render services in Canada.

The CRA states:

Every payer, whether a resident or non-resident of Canada, is responsible for Regulation 105 withholding on payments it makes to a non-resident in respect of services provided in Canada.

Accordingly, an American company would have to make Regulation 105 withholdings on payments made to another American company if the payments are made for services rendered in Canada. 

 

Remitting Requirements

Amounts withheld under Regulation 105 must be remitted to the CRA no later than the 15th of the month following the month in which the payment(s) were made to the non-resident recipient.

 

Need Help?

UHY Victor LLP has expertise in assessing filing requirements, applying for waivers and filing Canadian tax returns to recover Regulation 105 withholdings.

In addition to Regulation 105, our firm is prepared to assist with related Canadian tax issues such as Regulation 102, Sales Tax (GST/HST) and Corporate Tax.

Contact us for a consultation regarding your Regulation 105 issues:

UHY Victor LLP Canada U.S. Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

 

Additional Resources

UHY Victor Response to the Spread of COVID-19

UHY Victor is taking action to maintain the health and welfare of our team, our clients and support communal efforts to respond to the coronavirus pandemic.

UHY Victor will remain open during this difficult period and client services will continue. We have implemented contingency plans which allow us to continue to operate as we all deal with the spreading pandemic.

In light of the present situation we have introduced the following measures:

  • Our staff and procedures have been structured so that our team can work remotely.
  • Our IT infrastructure and data are protected by cutting edge security systems.
  • To the extent possible, client meetings will be held through web meetings and other remote solutions.
  • Employees who experience the primary symptoms such as fever, cough and respiratory difficulties will work remotely until cleared.
  • Internally, we emphasize the importance of “social distancing”, and have enhanced our internal cleaning and disinfecting protocols.

UHY Victor will continue to monitor the changing situation and, will respond proactively as this major health challenge evolves.

We encourage all to stay informed and to visit the Public Health Agency of Canada COVID-19 site, and follow the guidelines set out by the government of Canada:

  • Now and always during cold and flu season, stay home if you are sick. Encourage those you know are sick to stay home until they no longer have symptoms.
  • Since respiratory viruses, such as the one that causes COVID-19, are spread through contact, change how you greet one another. Instead of a handshake, a kiss or a hug, a friendly wave or elbow bump is less likely to expose you to respiratory viruses.
  • Practice frequent hand hygiene and coughing and sneezing etiquette. Clean and disinfect frequently touched objects and surfaces, such as toys and door handles.

For more information on the guidelines of the Government of Canada on how to be prepared for COVID-19: Click here.

 
 
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