The Canada Revenue Agency has revised its administrative stance on the application of withholding tax under paragraph 153(1)(g) of the Income Tax Act (Act) and section 105 of Canada’s Income Tax Regulations (Regulation 105). This revision relates to the reimbursement of subcontractor fees paid to non-residents for services performed in Canada, as outlined in two recent technical interpretations: CRA documents 2022-0943241E5 and 2022-0943242E5.
The CRA’s revised stance is that subcontractor fee reimbursements paid to non-resident corporations for services performed by the subcontractor in Canada should be subject to withholding tax; this deviates from the position it published in CRA document 2008-0297161E5. As a result of the revised stance, reimbursements of such subcontractor fees made after September 30, 2024, will be subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105.
Background
Paragraph 153(1)(g) requires that every “person”1 paying fees, commissions, or other amounts for services withhold tax to ensure that funds are available should an assessment of Canadian income tax be made against the payee (note that “person” can include a non-resident). Whether the payee has a positive tax liability is determined when the payee files a Canadian income tax return.
Where the payee is a non-resident, paragraph 153(1)(g) is supplemented by Regulation 105, which states that every person paying a fee, commission, or other amount to a non-resident in respect of services rendered in Canada is required to withhold 15% of the payment and remit the withheld amount to the CRA.2 Pursuant to subsection 153(1.1), where a non-resident can demonstrate that the withholding is in excess of the non-resident’s ultimate tax liability (i.e., based on the applicable double-tax agreement in place with Canada or the non-resident’s estimated income and expenses), they may apply for a waiver to waive or reduce the amount of the withholding.3
Weyerhaeuser Company Limited v The Queen4 (Weyerhaeuser) provides guidance on both paragraph 153(1)(g) of the Act and Regulation 105. In Weyerhaeuser, the taxpayer paid non-residents for services rendered in Canada but did not withhold on out-of-pocket cost reimbursements for travel costs and telephone and postage charges. The CRA subsequently assessed the taxpayer for failure to withhold on these reimbursements. The Tax Court of Canada disagreed with the CRA’s assessment, however, and held that: a) “fees, commissions or other amounts for services” are limited to amounts that have the character of income earned in Canada in the hands of the non-resident, and b) “amounts paid to reimburse contractors for their disbursements are not income earned in Canada.”5
Consistent with the court’s findings in the Weyerhaeuser case, the CRA issued document 2008-0297161E5, in which it states:
“Where the information regarding the reimbursements in respect of Subcontractor’s fees and travel costs is available and documented to the satisfaction of [taxpayer] at the time the payment is made by [taxpayer] to [non-resident], the current practice of the CRA … is that Regulation 105 withholdings would not generally be required in respect of amounts paid by [taxpayer] to [non-resident] as a reimbursement of [non-resident’s] expenses, including the Subcontractor’s fees and travel costs, with respect to the services rendered in Canada.”
Recent developments
In CRA document 2019-0823641I7, issued in 2020, the CRA confirmed that the reimbursement of travel costs by a non-resident to a subcontractor for services provided by the subcontractor in Canada would: a) receive the same treatment as travel costs paid by the non-resident and b) not be subject to Regulation 105 withholding. The CRA also concluded that advance payments made by a payor to a non-resident corporation, which are then used by the non-resident to pay for services performed by subcontractors in Canada, are subject to withholding tax, pursuant to paragraph 153(1)(g) and Regulation 105.
While it is not absolutely clear, it appears that CRA document 2019-0823641I7 differs from document 2008-0297161E5 in that the payments made to the non-resident were not considered “reimbursements” because they were paid in advance.
In CRA documents 2022-0943241E5 and 2022-0943242E5, the CRA changed its stance about the application of paragraph 153(1)(g) and Regulation 105 to reimbursements of subcontractor fees paid to a non-resident corporation for services performed in Canada. In particular, the CRA is now of the position that amounts paid for the reimbursement of subcontractor fees are subject to withholding, while the reimbursement of travel and meal costs is not.
This change in administrative view is effective for reimbursements of subcontractor fees paid after September 30, 2024. In CRA documents 2022-0943241E5 and 2022-0943242E5, the CRA confirmed that no interest, penalties, or additional Regulation 105 withholding will be assessed for payments made before October 1, 2024, should a taxpayer rely on CRA document 2008-0297161E5 for such payments.
Application examples
Scenario 1
A Canadian resident corporation (“CanCo”) contracts a non-resident corporation (“NRCo”) to provide services to CanCo, with some of the services to be provided in Canada. NRCo does not have a permanent establishment in Canada, nor does it want to carry on business in Canada. As such, NRCo engages a Canadian subcontractor (“CanSub”) to provide the required services in Canada. CanSub invoices NRCo $1,000 for the services it performed in Canada, which NRCo then invoices to CanCo (with the invoice to CanCo explicitly listing the reimbursement of the $1,000 service fee it was charged by CanSub).
Historical position: The reimbursement by CanCo to NRCo of NRCo’s $1,000 subcontracting expenses would generally not have been subject to withholding under paragraph 153(1)(g) and Regulation 105.
Latest guidance: In the absence of a valid waiver from the CRA, Regulation 105 withholding would be applicable to the amount paid by CanCo to NRCo as a reimbursement of CanSub’s $1,000 subcontracting fee; this would result in a withholding of $150 under Regulation 105. If the subcontractor rendering services in Canada to NRCo was instead a non-resident, the payment made by NRCo to the non-resident subcontractor would also be subject to a withholding obligation of $150 pursuant to Regulation 105, unless the subcontractor obtained a valid waiver in advance of the payment.
The only way NRCo would be able to obtain a refund of any withholding under Regulation 105 would be to file a Canadian corporate income tax return that is prepared either on the basis that: a) it is voluntarily filing to obtain this refund (assuming NRCo is not viewed to be carrying on business in Canada), or b) it is required to file but is entitled to a treaty exemption.
Scenario 2
CanCo provides services to various clients in Canada. CanCo is a member of an affiliated group with non-resident corporations that have no permanent establishment in Canada, including one in the US (“USCo”) and one in Hong Kong (“HKCo”). CanCo provides services to a Canadian resident corporation in Canada (“Client”) and subcontracts USCo to assist in providing said services. USCo performs some of its services physically in Canada.
The affiliated group centralizes all intercompany billings in HKCo. USCo invoices HKCo $1,000 for the services it provides to CanCo as follows: a) services rendered in Canada ($300), b) services rendered outside of Canada ($500), and c) reimbursement of travel expenses incurred by USCo ($200). HKCo, in turn, invoices CanCo for $1,000.
Historical position: The amount paid by CanCo to HKCo as reimbursement of USCo’s $300 fee for services rendered in Canada would generally not have been subject to withholding under paragraph 153(1)(g) and Regulation 105. Only the amount paid by HKCo to USCo of $300 for services rendered in Canada would be subject to withholding of $45 under Regulation 105.
Latest guidance: In addition to HKCo’s withholding obligation on its payment to USCo (mentioned above), CanCo would also have a withholding obligation under Regulation 105 on the amount paid by CanCo to HKCo as reimbursement of USCo’s fees for services provided in Canada ($300). Therefore, in the absence of a valid waiver from the CRA, $45 of withholding under Regulation 105 would be required on the amount paid by CanCo to HKCo.
See the comments under Scenario 1 relating to HKCo obtaining a refund of such withholding.
Withholding/waiver application updates
In the two scenarios above, withholding obligations under Regulation 105 should not be required when making payments to the non-resident corporations (i.e., NRCo, HKCo, and USCo) if the respective non-resident corporations are able to secure a valid waiver from the CRA.
In the 2024 federal budget, it was proposed to give the CRA legislative authority to grant single waivers that cover multiple transactions occurring over a specific time period when certain conditions are satisfied. The proposed legislation (subsection 153(8) of the Act) was released by the Department of Finance on August 12, 2024, with a public commentary period that ended on September 11, 2024. On August 26, 2024, Finance released updated explanatory notes that included some discussion of this proposal, but the necessary CRA implementation guidance had not been released at the time of this writing in October 2024.
Next steps
Canadian resident and non-resident corporations, partnerships, and other entities making payments to non-resident service providers that provide services in Canada through subcontractors should revisit the amount being withheld to ensure that the reimbursements of subcontractor fees are captured post-September 30, 2024; this includes confirming whether valid waivers have been obtained by the non-resident prior to payment. Entities with such arrangements should ensure that their non-resident service providers explicitly identify travel and meal expenses (whether incurred directly or by their subcontractors) in their invoices, given that these amounts are generally not subject to Regulation 105 withholding tax.
Joey Cheung is a manager in international tax services with PwC in Vancouver, where she specializes in outbound cross-border transactions and structures.
Ricky Didi is a director in international tax services with PwC in Vancouver, where he specializes in inbound and outbound cross-border tax consulting.
This article was originally published in the November/December 2024 issue of CPABC in Focus.
Footnotes
1 “Person” is defined in subsection 248(1) of the Act, and includes corporations.
2 Additional withholding tax applies on payments if the services are rendered in Quebec. Furthermore, Regulation 105(2) provides that withholding of 15% does not apply to payment described in the definition of “remuneration” in subsection 100(1) of the regulation.
3 The CRA’s Form R105 can be used to apply for a waiver pursuant to subsection 153(1.1).
4 Weyerhaeuser Company Limited v. The Queen, 2007 TCC 65.
5 Ibid.
