CRA declines to expand an exception from Reg. 105 withholding for reimbursing expenses of non-resident subcontractors
Canco entered into a contract (“Initial Contract”) with a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. Prior to the completion of the services, and in light of the financial difficulties of NR, Canco and NR entered into “Payment Agreements” under which Canco provided payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR, with such funds placed into dedicated bank accounts and paid to the subcontractors upon the authorization of both NR and Canco.
CRA found that such payments were subject to Reg. 105 withholding, stating:
If NR subcontracts its obligations under the Initial Contract rather than performing them directly and the amounts are ultimately paid by NR to subcontractors, that does not alter the fact that Canco is required to pay NR for services in Canada under the terms of the contracts and the Payment Agreements.
It noted that Weyerhaeuser found that Reg. 105 withholding is required only from those payments “having the character of remuneration for services rendered in Canada,” and that reimbursement of expenses of the subcontractor would not be subject to Reg. 105 withholding - but the payments here did not fit within that exception, i.e., they satisfied Canco’s obligation to NR under a contract for the performance of services in Canada.
Neal Armstrong. Summary of 16 October 2020 Internal T.I. 2019-0823641I7 under Reg. 105(1).