If I retain the services of a non-Canadian, do I have to withhold tax?
Regulation 105 of the Income tax Act requires any one who pays fees, commissions or other amounts to a non-resident person (individual or corporation) who has provided services in Canada, to withhold taxes calculated as 15% of the gross amount. This does not include wages. There are other regulations for wages.
Many US businesses are starting to look to Canada to expand or obtain work. As such, the Canada Revenue Agency does not want to loose out on any income generated by these non-residents while conducting business in Canada. Consequently, if these non-residents are contracted to perform work for your company in Canada then you, as payer, have to ensure these withholdings are remitted. Failure to do so will result in penalties and interest. Conducting business with non-residents can result in surprising tax liabilities.
Regulation 105 covers a wide variety of activities such as construction projects, entertainment, athletic events, forestry, consulting, manufacturing and lecturing. The regulation only applies if the work is done in Canada. If your company is purchasing an item made in the US, then no such withholding tax is required. However, if the US company sends someone to Canada to make or install the item, then any payment made will be subject to the regulation.
The regulation does not apply if you hire a non-resident to work in Canada as an employee. This is because they will be subject to regular salary withholdings. The 15% withholding tax is effectively a payment on account against tax on income earned in Canada by the non-resident.
There are various exemptions and waivers available from this withholding tax which require an understanding of the business involved and/or the completion of relevant forms. Alternatively, there are some tax planning measures that could be instigated to avoid regulation 105 from applying. The withholding tax is often refundable against the actual business tax the non-resident pays to Canada. They file a tax return and report the withholding tax as a prepayment and often times it is fully refunded.
If your company has entered into a business arrangement with a non-resident, please contact us to determine if you have any withholding tax issues.Download a copy of this issue here