16 September 2009 External T.I. 2008-0297161E5 - Regulation 105

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether reimbursements of subcontractor's fees and travel costs are subject to Regulation 105 withholdings?

Position: No, under the current practice of the CRA.

Reasons: Following the decision of Weyerhaeuser.

Note to reader: The correct reference number for this letter is 2008-029716 and not 2009-029716 as indicated in the letter.

XXXXXXXXXX 								2009-029716
S. Leung, CA
Attention:  XXXXXXXXXX 

September 16, 2009

Dear XXXXXXXXXX :

Re: Subsection 105(1) of the Income Tax Regulations ("Regulation 105")
Reimbursement of Subcontractor Fees

We are writing in reply to your letter of October 17, 2008 in which you requested our views as to whether paragraph 153(1)(g) of the Income Tax Act and Regulation 105 would apply to an amount paid to reimburse a non-resident of Canada ("NR") for amounts that NR in turn was required to pay to a third person ("Subcontractor") in respect of services rendered in Canada. The issue involved can be illustrated by the following example.

NR, a corporation incorporated and resident in the U.S., is obliged, under the terms of an agreement with a non-resident customer ("Customer"), to provide, among other things, certain services to Customer in Canada. NR enters into an agreement with Subcontractor under which Subcontractor provides in Canada all or part of the services described in the agreement between NR and Customer. Subcontractor sends an invoice to NR which separately identifies its fee for services rendered in Canada and any reimbursable travel and other costs. NR pays the Subcontractor's invoice in full. NR sends an invoice to Customer which separately identifies (i) its fee for services rendered in Canada, (ii) its fee for services rendered outside of Canada, (iii) any reimbursable travel and other costs, and (iv), as a reimbursable amount, the fee that NR has been invoiced by Subcontractor for the services rendered in Canada. Customer pays the NR's invoice in full.

You also enquire about certain current practice of the Canada Revenue Agency ("CRA") with respect to the administration of Regulation 105 regarding the above-noted example.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities and withholding obligations of such taxpayers. However, we can offer the following general comments.

Where the information regarding the reimbursements in respect of Subcontractor's fees and travel costs is available and documented to the satisfaction of Customer at the time the payment is made by Customer to NR, the current practice of the CRA ("CRA practice") is that Regulation 105 withholdings would not generally be required in respect of amounts paid by Customer to NR as a reimbursement of NR's expenses, including the Subcontractor's fee and travel costs, with respect to the services rendered in Canada.

The above-noted CRA practice would not be affected whether or not Subcontractor is a Canadian resident and whether or not NR is related to Subcontractor, provided that no avoidance of Canadian tax is suspected and that the invoice amount submitted by Subcontractor to NR with respect to the services rendered in Canada is reasonable.

Provided that sufficient records are kept by Customer of the amounts on which no withholding is made and the reasons for not withholding, there is no specific action that needs to be taken by Customer to notify the CRA that it will follow this CRA practice with respect to the Regulation 105 withholding.

The CRA practice applies to any applicable amounts paid to NR on a date following the day the decision in Weyerhaeuser was issued. However, Customer must have had the invoices and documentation in possession at the time of the payment for which the withholding was reduced. If the documentation is not available on the date the payment is made by Customer, withholdings under Regulation 105 apply to the full amount of the payment.

The reimbursed Subcontractor fee should be included in the "Gross income" box (Box 18) of the T4A-NR issued to NR, not in the "Travel expenses" box (Box 20). As a result, the tax withheld shown on the T4A-NR may be less than 15% of the gross income. CRA auditors or other compliance staff may enquire about the discrepancy and review the payments and withholdings.

It should also be noted that the Regulation 105 withholding requirement is applicable to the payments made by NR to Subcontractor if the Subcontractor is a non-resident of Canada. In such case, again, the reimbursement in respect of travel expenses separately listed on the invoice submitted by Subcontractor to NR is generally not subject to Regulation 105 withholding.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the CRA.

Yours truly,

Olli Laurikainen, CA
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch