TSG (Tax Specialist Group) - A REGular Problem (Regulation 105)

As discussed in Tax Tip 04-24, section 105 of the Regulations to the Income Tax Act ("Reg 105") requires that 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% of such payment. According to the CRA, Reg 105 applies to payments made in respect of services rendered or to be rendered in Canada.

Also of note, is the fact that the payor need not be resident in Canada for it to be required to withhold under Reg 105. For example, a foreign company that pays another foreign company to perform services for it, in Canada, is required to withhold 15% of such payment and remit it to the CRA.

The withholding may "cascade" through multiple companies involved in the same project. For example, assume a Canadian company hires a French company to install software in Canada. The French company subcontracts part of the work to a German company and requires that the German installers work in Canada. In this situation, the Canadian company would be required to withhold 15% under Reg 105 on its payment to the French company. Since the French company is paying the German company for services it will provide in Canada, 15% will have to be withheld from its payment to the German company (even though the German company is not being paid by a Canadian resident.)

The withholding tax is not the ultimate Canadian tax bill. It is applied to enforce foreign companies to meet the filing requirements related to carrying on business in Canada. For example, both the French and German companies noted above are required to file non-resident Canadian tax returns to determine their Canadian tax liability or disclose a treaty based exemption from Canadian tax. If no tax is due, the CRA will refund the 15% withheld. If tax is due, the 15% will be applied against the balance.

Thus, it is not only Canadian resident companies that are subject to Reg 105 and multiple companies can be affected at the same time. Scenarios such as the one described above are not uncommon but the withholding obligation of the foreign corporation is often overlooked.

Your TSG representative would be happy to discuss these complicated rules with you.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.