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Regulation 105 Alert: Non-Resident Withholdings often Missed by Canadian Companies

CompassGUIDES - May 2006

By Diana Matwichuk, Assignment Planning Specialist

Canadian corporations often bring international consulting expertise into the workplace without considering their withholding and reporting responsibilities for such an arrangement, what it will mean for the non-resident worker, or what planning could be done to avoid unpalatable tax situations.

Assignment managers bringing non-resident workers into Canada should ensure that they are very familiar with Regulation 105. Revisions to this policy in 2005 clarified any ambiguity that previously existed, but also made the requirements more strict, and created new burdens for non-residents working in Canada and those who pay for their services.

Regulation 105 Withholding Requirements

According to Regulation 105, any time that fees, commissions or other amounts are paid to a non-resident for services rendered in Canada, a withholding of 15% of the amount paid must be made and remitted to the Canada Revenue Agency (“CRA”).

This withholding is not the final tax payment, but rather a deposit against the ultimate tax liability. Non-resident workers in Canada must still file a Canadian tax return by April 30 of the year following that in which the services were rendered.

Regulation 105 withholdings must be made, regardless of whether the corporation paying for the services is a resident or non-resident corporation. Also, there is no restriction on the time span over which the services were rendered in Canada – even business trippers to Canada may be subject to non-resident withholding tax.

Determining the Taxable Payment Amount

It is sometimes difficult for Canadian corporations to determine the precise amount of income on which Regulation 105 withholdings calculations should be made, or the types of services that should be subject to non-resident withholding tax. Payments to non-resident artists and athletes, and payment for travel to and from the country of origin, are subject to Regulation 105 withholdings, whereas GST/HST payments and reasonable travel expenses are not. Meals expenses up to $45/day per person, and accommodation expenses up to $100/day per person, do not need to be included in the amount used in the 15% withholding tax calculation, and vouchers are not required to be retained by the payer.

Some payments to non-residents for services rendered in Canada are bundled with other payments such as purchases of property, software or proprietary items. In cases where the services rendered in Canada cannot be specifically identified, the CRA recommends that Regulation 105 withholding be made on the entire payment amount.

Similarly, when a non-resident is paid for services rendered in Canada, based on an invoice which does not specifically identify those services as separate from services rendered outside Canada, the CRA recommends withholding on the entire payment amount.

Employer Beware

Sometimes it is not even evident to the corporation doing business in Canada that the person to whom payments are being made for services rendered is a non-resident. That being said, the onus is on the corporation to comply with Regulation 105 withholding requirements, and is ultimately liable for this amount. The CRA suggests that corporations be alert to requests for payment to post office boxes, payment requested in foreign currency, and a foreign address on a contract or invoice. If there is any doubt at all about the Canadian residency status of the person providing services in Canada, the corporation should withhold and remit 15% from the payment for those services.

Non-Resident Consultant versus Non-Resident Employee

Regulation 105 withholdings do not apply to payment for services rendered in Canada by a seconded employee. If the corporation carrying on business in Canada has “acquired” the services of the non-resident worker by way of secondment or temporary assignment from another corporation, or if the non-resident worker is actually an employee of that company, then withholdings should be made at the regular statutory rate, per Regulation 102(1) calculations, rather than the Regulation 105 rate of 15%.

Per the CRA, secondments are specifically defined as:

“the temporary assignment of an employee from an entity (“the lending employer”) in a foreign country to an entity (“the receiving employer”) carrying on business in Canada, supported by the existence of an employer/employee relationship between the individual and the receiving employer. A secondment may exist regardless of whether the employee remains on the payroll of the lending employer or is transferred to the payroll of the receiving employer.”

Corporations should always ensure that employment contracts are in place and that tax clauses are included. At CompassGUIDES, we advise clients on the inclusion of these tax clauses, in order to avoid messy disagreements between business parties over non-resident withholding tax.

Applications for Waiver

Regulation 105 withholdings must be made, even if the income in question is exempt from tax under one of the many income tax treaties Canada has with other countries. However, either the non-resident performing the work in Canada, or his employer, can apply to the CRA for a waiver on these withholdings, based on the existence of a tax treaty.

Information Circular 75-6R2 “Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada” warns, however, that while most of the aforementioned tax treaties offer some relief from Canadian tax, Canada does not normally relinquish its right to withhold per Regulation 105.

Summary

Corporations carrying on business in Canada should always ensure that they are aware of the Regulation 105 withholding requirements on payments for services rendered, as well as their reporting obligations. And to avoid disputes, corporations should pro-actively include a Taxation and Accounting Protocol in employment and primary contracts with international parties.

At CompassGUIDES ™ , we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.

In concert with this strategic assignment tax planning, we assist multi-national employers with their preparation and provision of assignment documentation, including the possibility of offering these guides online to employees anywhere in the world with internet access. Visit our International Assignment Planning Help Desk for more information about international assignment planning.

The author wishes to thank Peter Simpson, CA, for his contribution to this article .

 


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Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6