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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.
If you carry on business in Canada, you should consider if your payments are subject to Regulation 105 withholdings. The Regulation 105 withholding rules apply to services provided in Canada, and not to the sale of goods or the reimbursement of expenses.
In general, non-residents must file a Canadian income tax return to calculate their Canadian tax liability and to obtain a refund of excess withholding amounts.
If you are a non-resident and think that the 15% withholding amount is more than your potential tax liability in Canada, either due to a tax treaty or your Canadian source taxable income, you can request that the Canada Revenue Agency (CRA) waive or reduce the 15% withholding rate.
If you provide services in Canada, the CRA requires that the Canadian customer withholds 15% of your invoiced amount, and remits these funds to the CRA on your behalf.
When you carry on business in Canada, you have to file a Canadian corporate income tax return (T2). The Regulation 105 15% withholdings are recorded as a tax instalment on the tax return. If you meet the criteria, you can apply for a refund of the 15% withholdings on the tax return.
Note that the withholding of 15% is not necessarily the final amount of Canadian taxes you owe, and is considered as an advance payment for the final amount of taxes you owe.
You must apply to the 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 Québec, an additional provincial withholding amount of 9% applies.
A waiver is a certificate issued by the CRA that relieves the Canadian customer’s obligation to withhold Regulation 105 15% amounts.
There are two types of Regulation 105 waivers:
If the Regulation 105 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.
Gross amounts paid to you by each of your Canadian customers should be shown on a T4A-NR slip issued by Feb. 28 of the year following the payment.
The Canadian tax return filing deadlines are as follows:
If applicable, you can claim a refund of any excess withholding amounts as part of this tax return.
Note that the CRA imposes penalties if you file your tax return late (even if you are in a refund position). In addition, the withholdings are not refundable if tax returns are filed more than 3 years after the relevant tax filing deadline.
The best way to avoid a Regulation 105 withholding is to apply for one of the two waivers or reductions of withholding from the CRA.
To apply for a waiver or a reduction of the amount to be withheld, 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 must submit Form R105 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 before the initial payment for the related services.
If you render services 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.
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 it includes services rendered outside of Canada, which are not subject to Regulation 105 withholdings.
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.
Many non-residents hire other companies and/or individuals to help them perform their work in Canada. As a result, American companies often engage other American contractors, Canadian residents, or both. The CRA calls it a multi-tiered contract because the American company or person hired to do the work in Canada employs other American individuals or companies to provide services in Canada.
The CRA states:
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 US Tax Team
Disclaimer: UHY Victor assumes no responsibility or liability for any errors or omissions of this site. The information used in this site is provided for general guidance. This article is not a substitute for professional legal advice.