Regulation 105: Withholding Tax for Non-Residents
In today’s global economy, earning income in a country in which you are a non-resident is commonplace. However, many countries have specialized tax rules in place that withhold part of this income. These rules are referred to as “withholding taxes”; one of Canada’s withholding taxes is found in Regulation 105 of the Income Tax Act.
What is Regulation 105?
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. This Regulation does not apply to the sale of goods; just to the payment of services.
The rationale behind Regulation 105 is to ensure that the non-resident service-provider pays any Canadian income tax duly owing. Regulation 105 is set out as follows:
“Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment.”
The types of activities typically caught by Regulation 105 include work site supervision, consulting, lecturing, equipment servicing, and participation in an entertainment or sports event.
How does Regulation 105 work?
Regulation 105 puts the majority of the withholding and remitting obligations on the payor for the services rendered in Canada. The payor is required to withhold 15% of the payments made. If the required amount is not withheld, the company must pay (on behalf of the non-resident) the payment amount plus interest and applicable penalties.
Additionally, the payor is required to remit all Regulation 105 withholdings to the Receiver General by the 15th of the month following the month in which the payment was made. Payors are required to file a special form in order to report all amounts paid to non-residents. This form is due by the last day of February of the year following the year in which payments were made.
The Waiver
The 15% withholding is not the final tax of the non-resident. The Canada Revenue Agency considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. To attempt to recoup part of the amount withheld, non-residents can file a Canadian income tax return to calculate their tax liability and obtain a refund, if any is warranted.
Where a non-resident can demonstrate that the withholding is higher than their potential tax liability in Canada, the CRA may reduce or waive the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit an application to the CRA. 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.
There are two types of waivers. There is a treaty-based waiver, which may result in a complete exemption. And, there is an income and expense waiver, which exempts the withholding tax based on income net of expenses, at normal income tax rates. Needless to say, the rules for the applicability of a waiver are quite complex.
Non-resident with non-resident tax return obligations in Canada
Are you a non-resident with non-resident tax return obligations in Canada? Are you currently employing non-residents in carrying out your operations? If so, you need to learn more about how Regulation 105 affects you. The highly experienced and certified tax accountants at Tax Doctors Canada are ready to help you with withholding and remitting the necessary amounts, as well as submitting waivers to recoup any excess you are entitled to.
Tax Doctors Canada offers a stress free Initial No Obligation Phone Consultation with one of our professionally certified tax accountants. We Welcome Your Business!
Tax Doctors Canada, a division of GTA Wealth Management Inc, has 3 office locations (by appointment only) in Toronto, Markham and Mississauga to serve you. You can also have one of our certified tax accountants assist you with your personal tax return requirements remotely from the comfort of your home utilizing Tax Doctors Canada's secure document transfer portal. We accept clients from Canada and worldwide.
