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Regulation 105: Top Questions Asked by Non-Residents Providing Services in Canada
What is Regulation 105?
Regulation 105 is a Canadian tax regulation that applies to Americans and other non-residents rendering services in Canada. This includes consulting services, training services, installation services, etc.
Regulation 105 withholdings generally apply only to services provided in Canada, and not to the sale of goods or the reimbursement of expenses.
If you have a Regulation 105 issue, be aware that you may also have a Regulation 102 (Canadian payroll), GST/HST (Canadian Sales Tax) and/or Canadian Corporate Tax issue.
Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.
Where a non-resident can demonstrate that the withholding is more than their potential tax liability in Canada, either due to treaty protection or income and expenses, the Canada Revenue Agency may waive or reduce the withholding.
If you render services in Canada, Regulation 105 requires that your Canadian customers withhold 15% of your invoiced amount, and remit those funds to the Canadian government on your behalf.
If you carry on business in Canada, you are required to file a Canadian income tax return and these withholdings are recorded as a tax instalment on this tax return. If you meet the criteria, you can apply for a refund of the 15% withholdings on the tax return.
Note that the 15% withholding is not necessarily the final amount of Canadian taxes that you owe – it is considered as an advance payment toward the final amount of taxes which are due.
You must apply to CRA International Tax Department for a business number (BN) so that Regulation 105 withholdings can be properly allocated and tracked.
Note that if the services are provided in the province of Québec, an additional provincial 9% withholding applies.
If the 15% amount is withheld, you need to file a Canadian tax return to calculate the final amount of tax that you owe and to receive a refund of any excess withholding amounts. You should receive a T4A-NR slip from each of your Canadian customers by Feb. 28 of the following year showing the gross amounts paid to you during the year and the Regulation 105 taxes withheld.
The Canadian tax return filing deadlines are as follows:
As part of this tax return, you can claim a refund of any excess withholding amounts, if applicable. Note that the CRA imposes penalties if non-resident files a tax return late (even if you are in a refund position). In addition, these taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.
The best way to avoid a Regulation 105 withholding is to apply for a waiver or reduction of withholding from the Canada Revenue Agency (CRA). There are two types of waivers:
As part of the application process, the applicant must demonstrate to the CRA that a waiver or reduction of the amount to be withheld is justified. To request a waiver, you need to submit Form R105 (Waiver Application) to the CRA tax services office in the area where the services are to be provided. Waiver applications must be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.
If services are rendered in Québec, you can request a waiver or reduction of the Québec 9% provincial withholding taxes by submitting Form TP-1016-V to Revenue Québec.
What is a Regulation 105 “Bundled Contract”?
A “Bundled Contract” occurs when a contract covers separate goods and services to be provided or includes services rendered partially inside and partially outside of Canada. This “bundled contract” causes issues, because Regulation 105 relates to services rendered in Canada, and the Bundled Contract includes services rendered outside of Canada, and frequently goods that are shipped to Canada.
The CRA states:
If an allocation cannot be made and documented, Regulation 105 withholding is recommended on all the payments made to the non-resident in respect of the goods and services provided.
Accordingly, the impact of Regulation 105 can often be reduced significantly by preparing documentation that will be acceptable to the CRA that isolates amounts paid for services exclusively rendered in Canada.
What is a Regulation 105 Multi-tiered Contract?
In completing their work, many non-residents hire other companies and/or individuals to help perform their work in Canada. This often results in the American company hiring other American contractors, Canadian resident contractors, or both. The CRA calls this a Multi-tiered contract because the American company or individual hired to carry out the work in Canada is hiring other American individuals or companies to render services in Canada.
The CRA states:
Accordingly, an American company would have to make Regulation 105 withholdings on payments made to another American company if the payments are made for services rendered in Canada.
Amounts withheld under Regulation 105 must be remitted to the CRA no later than the 15th of the month following the month in which the payment(s) were made to the non-resident recipient.
UHY Victor LLP has expertise in assessing filing requirements, applying for waivers and filing Canadian tax returns to recover Regulation 105 withholdings.
In addition to Regulation 105, our firm is prepared to assist with related Canadian tax issues such as Regulation 102, Sales Tax (GST/HST) and Corporate Tax.
Contact us for a consultation regarding your Regulation 105 issues:
UHY Victor LLP Canada U.S. Tax Team