29 April 2024 External T.I. 2022-0943241E5 - 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: When CanCustomer pays USCo for the amounts invoiced by the latter, what amounts are subject to the withholding authorized by paragraph 153(1)(g) of the Income Tax Act (Act) and specified in section 105 of the Regulations (Regulation 105)? In particular, is the portion of the invoice that represents the fee that USCo has been charged by another Canadian resident, CanSub, for services the latter rendered in Canada to CanCustomer, subject to the withholding authorized by paragraph 153(1)(g) of the Act and Regulation 105?

Position: The fees paid by CanCustomer to USCo, to the extent such fees are in respect of services performed in Canada, are subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105. Reimbursement by CanCustomer to USCo of travel costs and meals in respect of services performed in Canada would not be subject to withholding under paragraph 153(1)(g) and Regulation 105 provided CanCustomer agreed to reimburse the travel and meal costs.

Reasons: Weyerhaeuser Company Limited v The Queen 2007 TCC 65.

April 29, 2024

XXXXXXXXXX

Dear XXXXXXXXXX:

Re: Subsection 105(1) of the Income Tax Regulations (Regulation 105) to the Income Tax Act (Act) and Requirement to withhold

We are writing in reply to your letter of July 7, 2022 wherein you requested our views as to whether paragraph 153(1)(g) of the Act and Regulation 105 would apply to an amount paid to reimburse a non-resident of Canada for amounts that the latter in turn was required to pay a third person in respect of services rendered in Canada. The issue can be illustrated by the following example.

A corporation resident in the United States (USCo) enters into an agreement (Agreement) with a Canadian resident customer (CanCustomer) to provide services to CanCustomer, some of which are required to be physically performed in Canada and some of which may be performed outside of Canada. The services to be physically performed in Canada are the only services rendered in Canada under the Agreement to which Regulation 105 would apply. USCo enters into an agreement (Subcontract) with its Canadian resident subsidiary (CanSub) pursuant to which CanSub will provide the segment of the services under the Agreement which require a physical presence in Canada. CanCustomer deals at arm’s length with USCo and CanSub. Pursuant to the Agreement, CanCustomer agrees to reimburse USCo for all direct and indirect travel costs and meals.

Following the provision of the services by CanSub pursuant to the Subcontract, CanSub sends an invoice to USCo which separately identifies its fees for services rendered in Canada and any travel and meal costs incurred by CanSub. USCo pays Cansub’s invoice in full. USCo then sends an invoice (Invoice) to CanCustomer which separately identifies its fee for services performed outside Canada, travel and meal costs, and the fee that USCo has been invoiced by CanSub for the services performed in Canada.

Your question

Does CanCustomer have a requirement to withhold amounts pursuant to 153(1)(g) of the Act and Regulation 105 in respect of the portion of the Invoice that represents the fee, travel and meal costs that USCo has been invoiced by CanSub for the services performed by CanSub in Canada for the benefit of CanCustomer? More specifically, you asked for the CRA’s view in light of documents 2008-0297161E5 and 2019-0823641.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 153(1)(g) of the Act and its corollary in Regulation 105 provide for withholding where a person 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 must withhold and remit 15% of the fee, commission or other amount paid to the non-resident person.

In Weyerhaeuser Company Limited v The Queen (footnote 1) the Tax Court of Canada was asked to determine whether the Reg 105 withholding obligation extended to payments made by Weyerhaeuser (a Canadian resident corporation) to non-resident consultants to reimburse the latter for travel costs and other out-of-pocket disbursements, and for time spent travelling from the United States to British Columbia to render their services.

The Court summarized its findings as follows (footnote 2) :

“(i) The purpose of paragraph 153(1)(g) of the Act is simply to ensure that funds are available to satisfy an assessment for tax against a non-resident, should one be made. It is not a charging provision. Construed in light of that purpose, the words “fees, commissions or other amounts for services” are limited to amounts that have the character of income earned in Canada in the hands of the non-resident recipient, as it is only such amounts that are potentially taxable by Canada under subsection 2(3) of the Act.

(ii) […] the words “fee, commission or other amount in respect of services rendered in Canada, of any nature whatever” reach only those payments having the character of income earned in Canada by the non-resident payee.

(iii) Fees for work done in Canada are income earned in Canada.

(iv) Amounts paid to reimburse contractors for their disbursements are not income earned in Canada.

(v) Amounts paid for time spent traveling to Canada are not income earned in Canada. Amounts paid for time spent traveling within Canada are income earned in Canada.”

Pursuant to paragraph 2(3)(b) and subject to the application of the Canada-United States Income Tax Convention, the non-resident (USCo, in this case) is subject to tax in Canada on its taxable income earned in Canada as determined under section 115. On that basis, the amount that is “potentially subject to tax in Canada” which is subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105 is the gross income or revenue of the non-resident recipient (in this case, USCo).

CRA document 2008-0297161E5 dated September 16, 2009 (2008-029716) outlines the situation where a non-resident (NR) sends an invoice to a customer (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 a subcontractor for the services rendered in Canada. Customer pays NR's invoice in full. CRA opined as follows:

“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”. (Emphasis added).

CRA document 2019-0823641I7 dated October 16, 2020 (2019-082364) concludes that the portion of the subcontractor’s invoice paid by NR that is a reimbursement of travel costs would receive the same treatment as travel costs paid by NR (i.e., such travel costs are not subject to Regulation 105 withholding).

It also stated that, where a Canadian resident reimburses a non-resident for the amount the latter paid for the subcontractor fee, “(i)f 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, CRA document 2019-082364 concluded that the advance payments made by a Canadian resident corporation (Customer) to a non-resident corporation (NR) and applied to pay for services performed in Canada by subcontractors of NR are subject to withholding under paragraph 153(1)(g) of the Act and Regulation 105. That conclusion in 2019-082364 is difficult to reconcile with 2008-029716 which indicates that Customer would not be required to withhold under Regulation 105 on the Subcontractor’s fee paid to NR and to that extent, marked a change in the CRA position as expressed in 2008-029716.

The CRA’s view is that the decision of the Court in Weyerhaeuser stands for the proposition that the reimbursement of travel and meal expenses is not subject to withholding pursuant to Regulation 105 in situations that are similar to the situations in that decision.

In the scenario discussed in your request, consistent with the conclusion in the Weyerhaeuser decision in respect of travel costs and meals and 2019-082364, the reimbursement by CanCustomer to USCo of travel costs and meals, whether those amounts were paid by USCo or by Cansub, would not be subject to withholding tax under paragraph 153(1)(g) and Regulation105. The fees paid by CanCustomer to USCo, to the extent such fees are in respect of services performed in Canada, are subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105. As a sidenote, we note that if CanSub were a non-resident, then payments from USCo to CanSub may also be subject to Regulation 105 withholding.

This letter represents a change to CRA’s position that was made public on September 16, 2009 (i.e. 2008-029716). Reimbursement of subcontractor fees after June 30, 2024 are subject to Regulation 105 withholding. In addition, if taxpayers relied on 2008-029716, i.e., made payments potentially subject to Reg 105 withholding after September 16, 2009 and on or before June 30, 2024, provided taxpayers complied with the process specified in 2008-029716, none of interest, penalties and additional Reg 105 withholding will be assessed.

Where a non-resident can demonstrate, based on treaty protection or estimated income and expenses, that the normally required withholding is in excess of the ultimate tax liability, the CRA may waive or reduce the withholding accordingly pursuant to the Undue Hardship provisions of subsection 153(1.1) of the Act. Information on how to apply for a waiver can be found in paragraphs 56 to 63 of Information Circular IC 75-6R2 – Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada dated February 25, 2005.

Yours truly,

Angelina Argento
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Weyerhaeuser Company Limited v. The Queen, 2007 TCC 65 (“Weyerhaeuser”).

2 Weyerhaeuser, at paragraph 30.