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The CRA’s new position on withholding tax and non-resident contractors

Administrative relief reinstated until June 30, 2026

Updated: September 08, 2025

Canadian businesses and others making payments to non-resident service providers have a long-standing obligation to withhold 15% of the payment for services rendered in Canada. This withholding tax (known as the Regulation 105 withholding tax) is a pre-payment of the non-resident entity’s Canadian income tax obligation. 

Provided that the income tax return is filed within the statutory time frame, the amount withheld is either applied to Canadian taxes that are owed when the non-resident files a Canadian income tax return for taxable Canadian activities, or it is refunded if the non-resident can claim an exemption from Canadian tax due to an income tax treaty.

Quebec imposes an additional 9% withholding tax on similar payments if the services are rendered in the province of Quebec.

The Canada Revenue Agency’s administrative position

Historically, the Canada Revenue Agency (CRA) has allowed the payment subject to withholding tax to exclude the portion that is a reimbursement of expenses, provided the expenses and the Canadian service fees are itemized separately on the invoicing documents.

In 2024, the CRA modified its position with respect to withholding tax requirements for expenses that are subcontractor fees for services rendered in Canada. At that time, the CRA announced that its new position would apply to reimbursements of subcontractor fees paid after September 30, 2024. However, in August 2025, the CRA communicated to stakeholders that it will reinstate its previous administrative position to provide Regulation 105 withholding tax relief on subcontractor fee reimbursements, retroactive from September 2024 to June 30, 2026. This provides time for the CRA to complete stakeholder consultations on this issue.

How does the CRA’s new position impact businesses and contractors? A practical example

To understand the change in position on Regulation 105 withholdings on subcontractor fees, let’s consider the following scenario provided by the CRA:

  • A U.S. resident corporation (USCo) enters into an agreement (Agreement) to provide services to a Canadian resident customer (CanCustomer), some of which must be physically performed in Canada and some of which may be performed outside of Canada.
  • USCo enters into an agreement (Subcontract) with its Canadian resident subsidiary (CanSub) for CanSub to provide services that require a physical presence in Canada.
  • Under the Agreement, CanCustomer agrees to reimburse USCo for all direct and indirect travel costs and meals.
  • After CanSub provides services, it sends an invoice (Invoice #1) to USCo which separately itemizes its fees for services rendered in Canada from any travel and meal costs incurred.
  • USCo pays CanSub’s invoice. USCo then sends an invoice (Invoice #2) to CanCustomer, which separately identifies its fee for services performed outside Canada, the travel and meal costs, and the fee that CanSub invoiced for the services performed in Canada.

In this scenario, the CRA’s previous position would generally not require Regulation 105 withholdings on amounts paid by CanCustomer to USCo as a reimbursement of USCo’s subcontracting expenses.

The CRA is now making a distinction between the amounts reimbursed to USCo by CanCustomer for: 

  1. services rendered in Canada by CanSub; and 
  2. travel and meal costs incurred by CanSub to provide such services. 
Consistent with the Weyerhaeuser Company Limited v. The Queen (2007 TCC 65) decision, the cross-border reimbursement of travel costs and meals is not subject to withholding under Regulation 105. However, the portion of the reimbursement of CanSub’s fees invoiced by USCo and paid by CanCustomer, that are for services rendered in Canada by CanSub, are subject to Regulation 105 withholding tax. 

The CRA acknowledged that this is a change in its position.   

In this scenario, the CRA’s previous position would generally not require Regulation 105 withholdings on amounts paid by CanCustomer to USCo as a reimbursement of USCo’s subcontracting expenses.

The CRA is now making a distinction between the amounts reimbursed to USCo by CanCustomer for: 

  1. services rendered in Canada by CanSub; and 
  2. travel and meal costs incurred by CanSub to provide such services. 
Consistent with the Weyerhaeuser Company Limited v. The Queen (2007 TCC 65) decision, the cross-border reimbursement of travel costs and meals is not subject to withholding under Regulation 105. However, the portion of the reimbursement of CanSub’s fees invoiced by USCo and paid by CanCustomer, that are for services rendered in Canada by CanSub, are subject to Regulation 105 withholding tax. 

The CRA acknowledged that this is a change in its position.   

Waiver of withholding tax

The CRA allows non-residents to apply for relief from withholding tax in advance of receiving payments for services rendered in Canada by applying for a waiver. This waiver will generally be allowed when the non-resident can show that they do not have a permanent establishment in Canada and that their activities in Canada are exempt under an income tax treaty. When presented to the Canadian payor, the waiver allows the payor to make the payment free of withholding tax.

Both the 2024 federal budget and draft legislation released in August 2024 have proposed that such waivers can be applied to cover payments made within a specified period of time, instead of on a transaction-by-transaction basis, where certain conditions are met. In addition to pending legislation, improvements to the CRA’s waiver process are currently under consultation and not yet finalized by the CRA.

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Key takeaways

As the CRA’s new position requires Regulation 105 withholding on amounts paid to non-residents for the reimbursement of subcontractor fees for services rendered in Canada, it effectively reduces the amount the non-resident corporation will receive by the 15% withholding tax on these payments. It is important to consider the following next steps:

  1. As the CRA temporarily reinstated its administrative relief from Regulation 105 withholding on reimbursements of subcontractor fees until June 30, 2026, customers do not currently need to withhold on such payments. However, it is important to stay up-to-date and watch for developments from the CRA.
  2. When the CRA’s change in position was first announced in 2024, customers should have carefully reviewed agreements and invoices with non-resident contractors who use subcontractors to provide services in Canada, to determine if their Regulation 105 withholding tax obligations have changed. This remains a crucial step to take with new agreements entered into as this will help customers meet their withholding tax obligations and minimize the risk of penalties once the CRA’s administrative relief ends on June 30, 2026, and the CRA implements its updated position. 
  3. It is good practice for customers and non-resident contractors to clearly separate travel and meal cost reimbursements from the fees for services rendered in Canada on invoices to help minimize the amount that would be subject to withholding tax should the CRA move forward with its new position.


How BDO can help

If you are making payments to non-residents, a BDO advisor can help determine the impact of the CRA’s change in position, understand the temporary reinstatement of administrative relief, and prepare for further developments in 2026. If you are a non-resident business rendering services in Canada, either directly or through another business, BDO can offer strategies to reduce withholding taxes. For more information, please contact:

Greg London
Partner, Domestic Tax Consulting Leader
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Harry Chana
Partner, International & Cross Border Tax Services Leader
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Rachel Gervais
Managing Partner, Tax
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The information in this publication is current as of August 18, 2025.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.