Regulation 105 of the Income Tax Act (“the Act”) provides that all taxpayers must withhold 15% from any payment to a non-resident in consideration for services rendered in Canada. In addition, if the service is rendered in Quebec, a further 9% must be withheld and remitted to the Ministére du revenu. Amounts withheld must be remitted to the two governments by the 15th day of the month following the payment. These withholding rates are not reduced by any tax treaty.
For anyone who has chosen to remain ignorant of this requirement, I need only to point to the previous post in this series to prove that the CRA finds the “Global Economy” a very interesting topic and has various tools to check up on non-compliance. For example, in form T106, and on the corporate income tax return form T2, schedule 29, taxpayers are asked to identify payments made to non-residents that may be subject to withholding.
Ignorance may be bliss, but it won’t shelter a taxpayer from the significant penalties and interest that may be levied under the Act for failure to withhold. The penalties include $2,500 per failure, on top of an additional 10% of the tax, or 20% if the failure is attributable to gross negligence.
Who are these non-residents providing services to Canadians? They could be employees of a non-resident company, or self-employed individuals that provide any type of service such as consulting, installation or selling services to the Canadian taxpayer.
Whether the payee is subject to Canadian income tax at all is not of any concern to the payer. The non-resident must comply with Canada’s tax laws, and the regulation 105 withholding is a way for the CRA to ensure that that happens. In addition, from the payee’s point of view, any non-resident corporation carrying on business in Canada must file a return, subject to penalties for non-compliance, regardless of whether it is exempt from Canadian tax under a treaty.
In order to recover the taxes withheld, the non-resident must file a Canadian income tax return. If he is not taxable in Canada by virtue of a tax treaty, he will receive the full amount of the withheld tax as a refund. Of course, this is of little comfort to those with cash flow concerns.
The only way to avoid the withholding is for the non-resident to apply for a waiver. The application must be made at least 30 days prior to the payment, and it is a difficult process, with the requirement to show that a treaty does, in fact apply to eliminate the non-resident’s Canadian tax liability. Alternatively, the waiver application could ask that the withholding be based on the net income earned after any deductible expenses.
Regulation 105 is yet another tool to be wielded by the CRA to ensure compliance. Canadian payers caught unaware, may be forced to pay the price on behalf of their non-resident suppliers.