Withholding on Service Contracts with Non-Residents

If a person (which includes a corporation) pays a non-resident for services (other than employment services) provided in Canada, the person is generally required to withhold and remit 15% of the fees payable to the contractor to the CRA pursuant to regulation 105 of the Income Tax Regulations.

For example, a Canadian company (“Canco”) hires a US company (“USCo”) to perform maintenance on Canco’s servers.  USCo sends one or more people to Canada to complete the maintenance work.  USCo bills Canco $1,000.  Canco must pay $150 to the CRA and $850 to USCo. The payment to the CRA has to be made even if there is reason to believe that USCo is exempt from Canadian income tax (under the Canada-US tax treaty, for example).

Non-residents providing services in Canada can apply to the CRA for a reduction or waiver of the regulation 105 withholding if they can show that their ultimate Canadian tax is less than the 15% that would otherwise be withheld.  If a waiver/reduction is granted, the non-resident can provide a copy of this document to their customers so that their customers only withhold the amount indicated from their fees.

If you have any questions or concerns regarding the application of regulation 105, please contact us and we would be happy to assist you.

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