Regulation 105 

Tax Strategy

Regulation 105

FROM: JAN-FEB 2005 ISSUE | BY FRANCINE ST-ONGE

While international transactions of all types are now common, the tax requirements on such transactions are complex, and it is possible for a business to overlook some of its federal taxation obligations. One such obligation falls under Regulation 105 of the Income Tax Regulations and requires businesses to withhold 15 per cent of fees, commissions, and any other amount paid to non-resident contractors for services rendered in Canada.

If the required amount is not withheld, the company must pay (on behalf of the non-resident) the amount plus interest and applicable penalties. The company is entitled to recover the tax paid, but not the interest and penalties. It can be costly and difficult to recover tax paid on the non-resident's behalf, particularly when the company does not have an ongoing relationship with the individual. It is important to note that if the non-resident is an employee of the payer, Regulation 105 does not apply and the individual is subject to the same deductions at source as residents.

Regulation 105 applies to services such as work site supervision, consulting, equipment servicing, and participation in an entertainment or sports event. Thus, Regulation 105 requires a deduction of 15 per cent on the fees of artists, athletes, lecturers, consultants, and any other service provider. With respect to services, if a Canadian company hires a foreign company to provide equipment maintenance services and an employee of that company comes to Canada to render the service, the amount paid to the foreign company will be subject to the 15 per cent withholding fee. The services of actors in a film or video production are an anomaly in that they are subject to a deduction of 23 per cent under subsection 212(5.1) of the Income Tax Act.

The 15 per cent deduction applies to the gross amount of fees, commissions, or any other monies paid for services rendered, any amount of compensation for travel time for coming to Canada to provide the service, as well as any allowances for the stay in Canada. The Canada Revenue Agency (CRA) accepts that no tax be withheld on transportation, accommodation, and meal costs reimbursed to the non-resident, provided these costs are supported by receipts kept by the payer.

If equipment or other goods are purchased, some services may be included in the price. The question that then arises is whether a 15 per cent deduction under Regulation 105 is required, and on what amount. The CRA's current position is that if the non-resident employee is overseeing an installation to ensure it is done in accordance with the company's standards so as to limit any future claim, no amount is subject to the 15 per cent tax. In other cases, the CRA will require a breakdown of the cost between the goods and the service, with Regulation 105 applying to the service amount.

Application for Waiver

The 15 per cent deduction constitutes a payment on account with respect to the Part I tax that the non-resident may have to pay. If the non-resident believes that the actual tax liability will be less than the amount withheld, it is possible that the CRA will authorize the payer to not withhold any amount or to reduce the amount withheld. The waiver application must be made using Form R105, and should reach the CRA 30 days prior to the commencement of rendering of services in Canada, or 30 days prior to the initial payment. There are, essentially, two types of waiver applications: those based on a tax convention and those based on income and expenses.

The CRA's position on granting a waiver under a tax convention is set out in a document entitled "Guidelines for Treaty Based Waivers Involving Regulation 105 Withholding," available on the CRA Web site (www.cra-arc.gc.ca). To apply for this waiver, the non-resident must not have a fixed base or permanent establishment in Canada, so as not to have taxable business income in Canada under the tax convention between the country of residence and Canada. The non-resident must also meet one of the following criteria:

• the person is a non-resident, independent individual who will earn less than $5,000 in the current calendar year (including expenses reimbursed or paid on the waiver applicant's behalf);
• the person is a non-resident whose presence in Canada is not recurring and who performs services in Canada for fewer than 180 days under a contract of service. Recurring means that the non-resident undertakes to perform services under more than one contract during a period including the current year, the three preceding calendar years, and the three following calendar years; and
• the person is a non-resident whose presence in Canada is recurring, but whose cumulative presence is less than 240 days during a period including the current year, the three preceding calendar years, and the three following calendar years, and fewer than 180 days under a contract of service.

A waiver may also be granted on the basis of income and expenditures directly related to the services rendered. If it can be shown that the tax on the net income will be less than the amount of the withholding, the CRA may grant a total or partial waiver. The waiver application must be made each year, and the applicant must file an income tax return for the year.

Subcontracting

Non-residents who perform services in Canada may subcontract part of the work. If the subcontractor is also a non-resident, the non-resident payer must, under Regulation 105, withhold 15 per cent of payments made to the subcontractor. In fact, the amount paid to the subcontractor may be subject to a double withholding, since the Canadian business will have withheld tax on the full amount paid to the non-resident (unless a waiver is obtained), and the non-resident is required to withhold the amount paid to the subcontractor. To avoid such double taxation, the subcontractor can be paid directly by the Canadian resident.

When the subcontractor is Canadian, the non-resident is not subject to the withholding requirement under Regulation 105. But the Canadian payer will have to make a withholding on the full amount paid to the non-resident. Here again, the subcontractor could be paid directly by the Canadian resident to reduce the amount withheld in respect of the non-resident when a waiver cannot be obtained.

Compliance Issues

Amounts withheld under Regulation 105 must be remitted to CRA in the same timeframe as the employees' deductions at source. At the end of the calendar year, T4A-NR slips and a T4A-NR summary must be completed for each non-resident subject to a withholding under Regulation 105. These forms must be filed on or before the last day of February that follows the calendar year.

Many payments are subject to the Regulation 105 deduction, but too often, businesses and their advisors overlook it or are unaware of it, resulting in substantial costs.

[ TOP ]

Francine St-Onge, BBA, BCL, LLB, FCGA, practises tax and corporate law in Sutton, Quebec. She is co-author of the CGA-Canada course Taxation 2.

"Tax Strategy" is co-ordinated by J. ThomasMcCallum, CBV, FCGA, a business valuation and income tax consultant based in Whitby, Ontario, and author of several CGA-Canada professional development courses. E-mail jtmc@jthomasmccallum.com.

The information appearing in "Tax Strategy" is provided for the interest of the readers. Neither CGA Magazinenor the column authors and co-ordinator assumes any responsibility or liability to any persons relying on the information in the article to perform tax planning and/or compliance of any kind.