Regulation 105 - Non-Residents

Regarding the situation where a Canadian taxpayer (CanCo) engages a non-resident (NRCo) to provide services to be rendered in Canada, with NRCo subcontracting part of the services rendered to CanCo in Canada to another corporation (SupplierCo), CRA noted that its previous position in 2008-0297161E5 was that the reimbursement of an expense would not be subject to Reg. 105 withholding based on the finding in Weyerhaeuser that that Reg. 105 applied to an amount that is remuneration for services rendered that had the character of income in the hands of the recipient.

However, CRA’s new position was that an amount paid in the circumstances described here, other than the reimbursement of certain out-of-pocket costs (such as, apparently, the travel expenses in Weyerhaeuser), would be considered to be paid for services rendered in Canada that indeed have the character of income in the hands of NRco. The fact that NRco enters into a further agreement with the Supplierco does not alter the character of the payment to NRco, so that Reg. 105 would apply to the full amount received by such non-resident contractor irrespective of whether the subcontractor was a Canadian resident who was fully subject to Canadian tax.

A US company (USco) invoiced its arm’s length Canadian customer (CanCustomer) 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 CaSub.

After referring to Weyerhaeuser (including the statement therein 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,” CRA stated

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.

[Here] 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 … [in 2008-0297161E5] … . Reimbursement of subcontractor fees after June 30, 2024 are subject to Regulation 105 withholding.

Regarding the situation where LLC, which is a non-resident corporation filing Canadian corporate tax returns and claiming Treaty-based exemptions, paid commissions to the Canadian branch of Company B, a related non-resident corporation operating an Ontario branch and filing Canadian branch returns, CRA stated:

The reference to “every person paying”, for the purposes of Regulation 105, includes any individual, corporation, or trust, whether a resident or a non-resident of Canada. …

Since a “branch” of a non-resident corporation is not a separate legal entity from the non-resident corporation, payments to a Canadian branch of a non-resident corporation made in respect of services provided in Canada are subject to Regulation 105 withholding. ...

Where a non-resident can demonstrate that the normally required Regulation 105 withholding is in excess of the ultimate Canadian tax liability, the CRA may waive or reduce the withholding accordingly pursuant to the provisions of subsection 153(1.1) ... .

Canco licensed software of a US affiliate (USco), which it used to provide data analytics services to its Canadian customers. The software and Canadian customer data were kept on Canadian servers. USco personnel, physically situate at all times in the US, accessed the servers in order to maintain and (as required) upgrade the software and provide related quality-control services. Could part of the services rendered by USco be considered “services rendered in Canada” for purposes of Reg. 105?

CRA noted that although the server was being used in Canada to store information, CRA characterized the support services of USco as being accessory to the main supply of the software provided to Canco: USco was providing support services through telecommunications, computer, telephone, and software updates.

On this basis, it appeared that the office support services of the USco employees would be rendered in the United States and delivered, through a communications system such as a computer or telephone, to Canco and its employees, so that such aspect of the payment would be viewed as being in respect of the services rendered.

S. 118.4(2)(a) indicates, respecting references in various provisions to listed types of health-care professionals, that “where the reference is used in respect of a service rendered to a taxpayer,” the reference to an authorized health care professional refers to authorization “pursuant to the laws of the jurisdiction in which the service is rendered.” In the context of services rendered virtually, is this referring to the health care professional’s location at the time of rendering the services, or to the location of the patient at such times? CRA stated:

It is a question of fact whether a virtual medical service is considered rendered at the location of the health care professional, the location of the patient, or both. Many governing bodies regulate virtual medical services performed within their province. This can include licensing requirements for professionals performing virtual medical services within their province, licensing requirements for professionals in their province performing virtual medical services for a patient in another province, licensing requirements for professionals performing virtual medical services from outside their province for an individual within their province, and so on. Each of these requirements must be considered before a determination can be made.

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. The Directorate stated:

[B]ased on the terms of the Payment Agreements … 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. …[S]uch advanced payments are [quoting Weyerhaeuser] 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 [those] … in … 2008-29716 … .

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 … the advance payments made by Canco to NR under the Payment Agreements are subject to the withholding requirements of section 105 … .

Under the proposed Interchange Agreement with a non-resident corporation (“NRCo”) and a non-resident employee of NRCo, the employee will provide services to the Department for one year while staying at temporary accommodation in Canada, but will remain a non-resident, as well as remaining on the NRCo payroll as an NRCo employee. The Department will reimburse NRCo for the employee’s salary and benefits (with no mark-up thereof).

Before finding that the reimbursement payments will be subject to Reg. 105 withholding, CRA stated:

[A] non-resident employer that sends an employee to Canada to exercise employment duties for the employer for one year would generally be rendering services in Canada. …

Canco entered into a “Financial Services Agreement” with a non-resident Advisor who agreed to provide assistance respecting a proposed sale of Canco or its business including analyzing the business, marketing Canco and its business, coordinating the data room and due diligence by potential purchasers, evaluating purchase proposals, and structuring and negotiating the sale.

At Canco’s request the Advisor will meet with Canco’s board of directors to discuss the proposed Sale.

Respecting the applicability of Reg. 105 withholding to fees paid to the Advisor or its affiliates, the Directorate stated:

[I]t would appear that at least some of the services, particularly meeting with the Board of Directors would be provided in Canada. As noted in paragraph 32 of Information Circular 75-6R2,

“The portions allocated to the services to be performed inside and outside Canada must be clearly expressed either within the contract or through the related information and documents. It is the responsibility of the non-resident and the payer to determine the proper value of these amounts.”

A Canadian company outsourced some of its activities to a non-resident enterprise, so that the non-resident now operates a call centre which fields and handles calls received from the mostly-Canadian customers of the Canadian company. Is the call centre rendering services in Canada? After noting that the services were "using a telecommunication system as the means of transmission," CRA responded (TaxInterpretations translation):

In the case where such services are rendered by means of a call centre established abroad, the CRA is generally of the view that the services would not be rendered in Canada. Accordingly, no withholding at source would be made…[under] subsection 105(1)… .

A fee is paid to a U.S. musician for the cancellation of a scheduled Canadian performance. There may have been rehearsals in Canada. CRA stated:

Preparation, rehearsals, and training are considered normal activities of an artist or athlete ("performer")... . Where a performer receives a payment in respect of a performance to be done in Canada, notwithstanding that the payment may be in respect of the performance itself or for its preparation, rehearsals, or training, the requirement to withhold under section 105 of the Regulations still exists, unless a treaty based waiver is obtained.

Respecting whether CRA requires every non-resident partner of a US partnership which has been subject to Reg. 105 withholding to file a Canadian tax return to claim a refund of a share of the withholding, CRA stated:

Non-resident partners of a partnership are required to file a Canadian income tax return to calculate their tax liability and to obtain a refund. There is currently no administrative procedure whereby a refund can be issued in respect of a particular non-resident partner’s share of the Regulation 105 withholding without that partner filing a tax return. However, where a partnership can demonstrate, based on treaty protection, that the normally required withholding is in excess of the ultimate tax liability, the partnership can make an application for a treaty-based waiver of Regulation 105 withholding on behalf of the partners.

A US partnership (USFirm) subcontracts part of its contract, to perform consulting services to an arm's length Canadian customer (Canco), to an arm's-length Canadian professional firm (CanFirm) and Reg. 105 withholding is deducted by Canco on payments made to USFirm. In response to queries as to whether CRA require every partner of USFirm that is allocated income pertaining to the activities in Canada to file a Canadian tax return to claim its share of the withholding, and whether CRA requires every partner that is a corporation to file a Canadian corporate income tax return under the "carrying on business in Canada" criteria, CRA stated:

There is currently no administrative procedure whereby a refund can be issued in respect of a particular non-resident partner's share of the Regulation 105 withholding without that partner filing a tax return. However, where a partnership can demonstrate, based on treaty protection, that the normally required withholding is in excess of the ultimate tax liability, the partnership can make an application for a treaty-based waiver of Regulation 105 withholding on behalf of the partnership.

Corporate members of a partnership must file an income tax return pursuant to paragraph clause 150(1)(a)(i)(B) if they carry on business in Canada (i.e. including through a partnership).

a Canadian town will pay a deposit to the non-resident agent for a non-resident artist who will perform in a stage production operated by the town.

In light of the broad meaning of "in respect of," the town will be required to withhold from the deposit unless it receives a written waiver from CRA. If the show is cancelled, a refund may be obtained by the non-resident artist only after the assessment of the Canadian income tax return for that year.

Suppose a US-resident taxpayer provides services in Canada for 130 days between 1 October to 28 February, does not anticipate providing further services in Canada, and obtains regulation 105 waivers for services provided in that period. Nevertheless, the taxpayer returns to Canada to provide services for 60 days between 1 July to 31 August the same year. This would trigger Art. V(9)(a) of the Canada-US Convention retroactively to impute a permanent establishment. The taxpayer would thus be late in filing a T1 in respect of income from Canada for 1 October-31 December.

CRA stated that it "may" apply relief provisions on the penalties and accumulated interest for 1 October-31 December - "Taxpayers will have to advise the CRA of their circumstances, and the CRA will review each request on the basis of the information provided."

CRA does not expect retroactive remittances for the period where the waivers were valid, but withholdings must commence starting 1 July. The taxpayer is obligated to file T1 forms and pay the resulting Canadian income tax liability from the 1 October-28 February period.

A Canadian real estate agent paid a portion of its commission generated on a sale of Canadian real estate (occurring between resident Canadians) to a UK-resident broker for services of that individual (performed in the UK, without travelling to Canada) which contributed to the sale, including financial analysis and participating in conference calls. CRA stated

[A] commission paid to a non-resident of Canada is not subject to withholding tax under ITR subsection 105(1) if all of the services rendered by the non-resident are performed outside Canada.

Although directors fees are salaries and wages for tax purposes and, therefore, are subject to Article XV of the Canada-U.S. Convention rather than Article XIV, it is RC's administrative practice to permit fees paid to a non-resident director for services rendered in Canada to be withheld at the flat rate of 15% specified in Regulation 105.

"If an individual comes to Canada and exercises his duties of employment for a Canadian company and the costs, whether directly or indirectly, are borne by the Canadian company, the presumption is that the Canadian company is an employer and the individual is taxed in Canada unless there are other facts which dictate the contrary ... . In such a case, the provisions of subsection 105(1) ... would not be applicable ... ."

Any GST payable on the fee paid to the non-resident is not subject to the withholding tax.

Where the service of a non-resident is the providing of information or advice by way of a telephone or electronic mail hotline and where the non-resident so providing such information or advice is not in Canada, the service will not be considered to be rendered in Canada. The shipping of materials from the United States and the giving of maintenance instructions via a telephone line also would be exempt on the same grounds.