Where a person pays to a non-resident of Canada a fee, commission or other amount in respect of services rendered in Canada, of any nature whatsoever, the payor is required to withhold income tax from that payment. Pursuant to paragraph 153(1)(g) and Regulation 105 of the Income Tax Act (the Act), the payor must withhold and remit to the Receiver General income tax of 15% of the amount paid to the non-resident. If the services are rendered in the Province of Quebec, an additional 9% must be withheld and remitted to the Minister of Revenue for Quebec.
The income tax withheld must be remitted on or before the 15th of the month following the month in which the payment was made to the non-resident. Information slips (form T4A-NR) must be prepared and filed by the last day in February in the year following the year in which the payment was made. A copy of the information slip must be provided to the non-resident for the non-resident’s tax filings, as the income tax withheld is considered on account of the non-resident's Canadian income tax liability.
Pursuant to subsection 227(8.4) of the Act, failure to withhold renders the payor liable to pay the tax on behalf of the non-resident. Subsection 227.1(1) of the Act extends this liability to directors of a corporate payor. Further, failure to withhold will subject the payor to a potential penalty of 10% of the amount that should have been withheld. For repeat failures or in cases of negligence, that penalty will double to 20%. Interest is also charged at the prescribed rate.
The obligation to withhold applies to every person paying for services rendered in Canada by a non-resident. "Every person" includes individuals, corporations, trusts, and each member of a partnership. The obligation to withhold applies to payments made to non-residents, including non-resident individuals, non-resident corporations, non-resident trusts, and non-resident participants in partnerships or joint ventures. The types of activities that require withholding include consulting, engineering, legal, accounting, seminars and conferences, construction, installations, forestry, manufacturing, oil and gas, and entertainment.
The obligation to withhold does not apply in cases in which the non-resident is an employee of the payor. In that case, standard payroll withholdings will apply. However, the obligation to withhold will apply in cases where a non-resident employee remains on the payroll of the foreign employer and is seconded to provide services to the payor carrying on business in Canada.
As discussed above, the income tax withheld and remitted is considered payment on account of the non-resident's Canadian income tax liability. In cases where that liability is established by the non-resident service provider to be less than the amount that was remitted, the non-resident is entitled to a refund of the excess. Similarly, where the non-resident service provider can demonstrate, based on treaty protection or estimated net income, that the 15% withholding tax will be in excess of the non-resident's ultimate Canadian income tax liability, the non-resident may apply for a waiver or reduction in that withholding amount. The application is made by filing the appropriate information with the Canada Revenue Agency (CRA).
Summary
Paragraph 153(1)(g) and Regulation 105 of the Act do not impose a liability on the non-resident service provider. Rather, they impose an obligation on the payor to withhold and to remit income tax on behalf of the non-resident service provider. The penalties for failure to comply with these rules can be onerous for the payor. The CRA normally will limit audit periods to the current year plus the two previous years. In some cases, the audit period is extended to six previous years.
Whether you are a purchaser or a provider of non-resident services rendered in Canada, it would be wise to consult your Collins Barrow tax advisor to discuss the applicability of these rules.
Robert W. Rock is a tax partner in the Ottawa office of Collins Barrow.
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