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Withholding Tax For Services Done - By Non-Residents in Canada

Subject: Withholding Tax Number: 04-24 Date: 9/24/2004

A 15% withholding tax may be payable for services rendered in Canada.

Regulation 105 states that every person that pays a "fee, commission or other amount in respect of services rendered in Canada" to a non-resident shall deduct or withhold 15% of such payment unless it is "remuneration." Remuneration is generally defined as salaries, wages or pension-type income. Remuneration income is generally subject to regular Canadian withholding taxes.

This means that any time a non-resident performs a service in Canada, there should be a 15% withholding tax remitted to the CRA. There are, however, other rules which state that in certain circumstances a non-resident is not taxable in Canada on some of the activities that he/she may carry on. For example, according to most treaties that Canada has with other countries, a non-resident is not taxable in Canada on business activities if the non-resident does not have a permanent establishment in Canada. This means that if a non-resident comes to Canada and provides services and does not have a permanent place of operations, they are not taxable in Canada on an income tax basis. Regulation 105 states that even though they are not taxable overall, a 15% withholding tax must be remitted. The non-resident would recover the 15% withholding tax by filing an income tax return showing the withholding tax as a payment made on their account and requesting a refund. In this way, the CRA has the ability to determine if that non-resident is actually taxable in Canada or not.

There is a mechanism to ask for a waiver of any Regulation 105 withholding taxes. The CRA has made a number of pronouncements stating that there are fewer and fewer circumstances where they will provide a waiver of the 15% withholding tax.

It is important to note that it is the liability of the Canadian payor to withhold the 15% tax.

In summary, if a non-resident is providing services in Canada, there should be a 15% withholding tax for which the non-resident can file for a refund at a later point in time.

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