Tax Articles
Buy Services from or Employ Non-residents? Better not Hold Out on Withholding Tax
Business Times
Harry Uhrig, CA
As more Canadian businesses think globally, they are contracting with and employing more people from other countries.
Not all of these businesses are aware, however, that if they pay a non-resident a fee (including a director’s fee) or commission for services the non-resident provides in Canada, the employer is required to withhold 15% of the payment and remit it to the Canada Revenue Agency (CRA). Employers are also required to withhold tax for non-resident employees. In fact, remuneration paid to non-resident employees who provide services in Canada is subject to the same withholding, remitting and reporting obligations as employees who are Canadian residents.
If you don’t want to pay the CRA’s stiff withholding tax penalties – up to 20% of the amount due, plus interest – you should know how the relevant sections of the Income Tax Act apply to you in such situations.
According to regulation 105 of the Income Tax Act: “Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15% of such payment.”
Here’s where it gets sticky. The reference to “person” includes not only individuals, but also corporations, trusts and partnerships. The reference to “services” and “of any nature whatever” covers broad territory: from professional services, to construction, to manufacturing, entertainment, training, and even lecturing at events.
While Canada has tax treaties with many countries where income from services such as these is taxed only in the country where the person has a permanent establishment or a fixed place of business, the CRA still requires Canadian purchasers to withhold the 15% tax. The reason is that the agency is responsible for determining the tax status of the income when the service provider files a Canadian tax return. Should the CRA decide that the income is treaty-exempt in Canada, it will refund the payment to the service provider.
If you pay salary, commissions, bonuses or other remuneration to non-residents who provide services here, regulation 102 of the Income Tax Act also requires you to remit the appropriate withholding tax, along with Canada Pension Plan contributions and Employment Insurance premiums.
In certain situations, your non-resident suppliers or employees may be able to obtain a waiver to reduce or avoid the withholding tax. However, they – or you on their behalf -- must apply for these waivers from the CRA at least 30 days before starting work or receiving payment.
From your perspective, you can avoid hassles with the CRA by documenting in a supplier agreement with a non-resident that you will remit 15% of the fee to the CRA, and that
the supplier is responsible for dealing with the CRA on any issues that may arise regarding this withholding. Then, when you pay your supplier, be sure to withhold the appropriate tax and remit it to the CRA by the fifteenth day of the month following the month in which you withheld the funds.
When it comes to non-resident employees, whether or not you have a waiver from the CRA, you must prepare and file a T4 information return for that individual. The non-resident employee will then file a Canadian income tax return and the CRA will subsequently assess his or her taxes or refund owing.
So play it safe when working with non-residents: don’t hold out when it comes to withholding the necessary taxes and deductions.
Harry Uhrig is a Partner with BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed.
