CRA announces that a non-resident service provider’s charges to reimburse it for invoices of a subcontractor for services rendered in Canada will now be subject to Reg. 105 withholding

A US company (USco) invoiced its arm’s length Canadian customer for services rendered by it outside Canada and for services rendered in Canada by its Canadian subsidiary (CanSub), as reflected in CanSub’s invoice. The USco invoice included separately identified charges for the travel and meal costs of it and CanSub.

After confirming that the reimbursements by the Canadian customer of the travel costs and meals of USCo and Cansub were not subject to Reg. 105 withholding, CRA further found that the fees paid by the Canadian customer in respect of the services performed in Canada of the subcontractor (CanSub) were subject to Reg. 105 withholding – and noted that this position would be the same even if CanSub were a non-resident of Canada.

This letter represented a change to CRA’s position in 2008-0297161E5. Reimbursement of subcontractor fees after September 30, 2024 would be subject to Reg. 105 withholding.

CRA claimed that this somewhat new position (see also 2019-0823641I7) was based on Weyerhaeuser (2007 TCC 65) notwithstanding having quoted the finding in that case that “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.”

Neal Armstrong. Summary of 29 April 2024 External T.I. 2022-0943241E5 under Reg. 105(1).