16 October 2020 Internal T.I. 2019-0823641I7 - Regulation 105 - requirement to withhold

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 the withholding requirements under section 105 of the Income Tax Regulations (the “Regulations”) in respect of payments described in paragraph 153(1)(g) of the Income Tax Act (the “Act”) apply to a particular situation.

Position: Yes.

Reasons: The advanced payments made by Canco under the terms of the Payment Agreements are payments to NR for the services performed in Canada under the Initial Contract. As such, the recipient of the payments is NR in payment for such services and the payments are income in NR’s hands. 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.

October 16, 2020

Vancouver Tax Service Office					Headquarters
Non-Resident Audit Division					Income Tax Rulings
Pacific Region							Directorate
G. Godson

Attention: Harold Wolff					2019-082364

Withholding Requirement – Regulation 105

We are writing in reply to your email of October 25, 2019, wherein you requested our views regarding the withholding requirements under section 105 of the Income Tax Regulations (the “Regulations”) in respect of payments described in paragraph 153(1)(g) of the Income Tax Act (the “Act”).

As outlined in your enquiry, a Canadian-resident corporation (“Canco”) entered into a contract (“Initial Contract”) for services to be provided by a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. NR hired various subcontractors, both resident and non-resident, to complete the project in Canada. In your view and in the view of Canco and NR, the payments made by Canco under the Initial Contract for the services in Canada performed by NR were subject to withholding under section 105 of the Regulations.

Prior to the completion of the services in Canada, Canco and NR entered into various agreements (“Payment Agreements”). The Payment Agreements outline procedures for Canco to provide payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR. These funds were placed into a dedicated bank account or accounts and were paid to the subcontractors upon the authorization of both NR and Canco. It is our understanding that the dedicated bank accounts were set up solely to facilitate the payments to the subcontractors. You have advised that the purpose of these agreements was to ensure the subcontractors are paid for the services performed in Canada, due to the fact that NR’s financial difficulties put the completion of the supply and installation of the boilers in jeopardy.

It is your view that Canco is required to withhold on the payments made according to the terms of the Payment Agreements as Canco is paying a non-resident for services in Canada. In addition, it is your view that the payments are income in the hands of the recipient.

The representative for Canco is of the view that, due to the terms of the Payment Agreements, Canco is reimbursing NR for the non-resident subcontractor fees and, as such, is not subject to the withholding requirement of section 105 of the Regulations. The representative also states our document 2008-029716 supports this view. The representative further argues that the payments do not have the character of income in the hands of the recipient.

You have requested our view on whether Canco is required to withhold on the payments made according to the Payment Agreements.

Our comments

Section 105 of the Regulations applies where a person resident in Canada pays to a non-resident person a fee, commission or other amount in respect of services rendered in Canada. Where Regulation 105 applies, the person resident in Canada must withhold and remit 15% of the fee, commission or other amount paid to the non-resident person.

The Tax Court of Canada opined in Weyerhaeuser Co. Ltd. ( 2007 TCC 65) (“Weyerhaeuser”) that the withholding under Regulation 105 is required only from those payments “having the character of remuneration for services rendered in Canada and thus potentially taxable by Canada in the non-resident’s hands.”

In the situation at hand, Canco and NR entered into contracts whereby NR was to supply and install machinery and equipment at various locations in Canada. The payments by Canco are made to NR in respect of services performed in Canada. As such, they are subject to the withholding requirements of section 105 of the Regulations.

Our document 2008-029716 provides the view that where a Canadian taxpayer enters into a contract with a non-resident to perform services in Canada, no withholding under Regulation 105 is applicable to the amounts paid by the Canadian taxpayer to the non-resident for the reimbursement of the travel expenses paid by the non-resident to a subcontractor. This view is consistent with the decision in Weyerhaeuser. In document 2008-029716, we stated that where a Canadian taxpayer reimburses a non-resident for the amount the non-resident paid for the subcontractor fees, the Canadian taxpayer is not required to withhold on the amounts paid for the reimbursements. It should be noted that this is true only to the extent that the subcontractor fees are not remuneration.

With respect to the situation at hand, it is our understanding, based on the terms of the Payment Agreements entered into between Canco and NR, that Canco agrees to make advanced payments to NR that are set off or deducted from the amount due by Canco to NR required under the Initial Contract. In this regard, it is our understanding that such advanced payments are in respect “of remuneration for services rendered in Canada and thus potentially taxable by Canada in the non-resident’s hands”, not in the nature of a reimbursement of expenses of the subcontractor. As such, the nature of the payments is different from the payments described in document 2008-29716 and on that basis, the comments in our 2008 document are not relevant here.

In particular, it is our view that the advanced payments made by Canco under the terms of the Payment Agreements are payments to NR for the services performed in Canada under the Initial Contract. As such, the recipient of the payments is NR in payment for such services and the payments are income in NR’s hands. 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.

Accordingly, we agree with your view that the advance payments made by Canco to NR under the Payment Agreements are subject to the withholding requirements of section 105 of the Regulations. Furthermore, we agree with your view that the payments made by Canco have the character of remuneration for services rendered in Canada, and, as such, are income in the hands of NR.

We trust these comments will be of assistance.

Terry Young, CPA CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

UNCLASSIFIED