What Regulation 105 requires
Regulation 105 is the federal withholding rule for payments made to non-residents for services rendered in Canada when the payment is not employment remuneration. The rule generally requires the payer to withhold 15 percent of the gross amount paid for services rendered in Canada. CRA treats this withholding as a payment on account of the non-resident’s potential Canadian income tax liability rather than a final tax. If the withholding ends up being more than the final Canadian tax liability, the non resident typically recovers the excess through the Canadian tax filing process, where required.
When Regulation 105 applies and when it does not
Regulation 105 applies broadly to fees, commissions and other amounts paid to a non-resident in respect of services rendered in Canada. CRA administrative guidance also treats advance payments made in respect of services to be performed in Canada as being within the scope of the withholding rule. The rule is not limited to Canadian resident payers. It can apply even when the payer is also a non-resident if the services are rendered in Canada.
The key carve-out is employment remuneration. Regulation 105 is not the withholding regime for employment income, and the payer must consider the separate employment withholding and reporting framework in those cases. Regulation 105 also contains narrow exclusions for certain payments involving specific regulated financial entities.
A recurring practical issue is mixed work, where some work is performed in Canada and some outside Canada. Regulation 105 is triggered by services rendered in Canada so the Canadian component is the focus. This is why documentation around where the work was physically performed matters, especially for short-term projects that involve travel into Canada.
Remittance timing and payer obligations
When Regulation 105 withholding is required, the payer is responsible for withholding and remitting on time. CRA states that remittances are due so that CRA receives them on or before the 15th day of the month following the month in which the amount was paid or credited to the non-resident. CRA also applies a weekend and holiday rule, so if the due date falls on a weekend or a public holiday, the remittance is due the next business day. CRA also states that if the business or activity ends during the year, any required remittance is due no later than seven days after the business or activity ends.
Because Regulation 105 remittances are handled through a payroll program account, payers often need to ensure they have the appropriate CRA program account set up before the first payment is made.
Regulation 105 Waivers
Regulation 105 waivers and how to reduce or eliminate withholding
A Regulation 105 waiver is a written authorization from CRA that permits a payer to reduce the withholding rate or not withhold at all for specific payments. CRA may grant a waiver or reduction when the non-resident can show that the standard gross-based withholding is more than the non-resident’s expected Canadian tax liability.
CRA recognizes two common bases for relief. One is treaty-based relief, where the non-resident can demonstrate the income is not taxable in Canada under an applicable tax treaty. The other is an income and expense approach where the non-resident expects Canadian taxable income, but the 15 percent of gross would exceed the expected final tax once reasonable expenses are considered.
An important compliance point is that treaty protection does not automatically switch off Regulation 105 withholding at the payer level. The practical mechanism for reducing withholding is the waiver process, and the payer needs to have the CRA authorization in hand before paying without withholding.
When a waiver can work and the timing rules that matter
CRA expects waiver applications to be submitted no later than 30 days before the non-resident begins the period of service in Canada or 30 days before the non-resident receives the first payment for the related services. That timing is important because payers generally must continue withholding until CRA issues written authorization. CRA also states that if a waiver is granted after payments have already started, it generally applies only to payments made after the waiver is issued, which means it is not a reliable tool for retroactively fixing missed withholding on earlier payments.
When a waiver cannot be used
A waiver cannot be relied on unless the payer has written CRA authorization. Without that written authorization, the payer must withhold the usual 15 percent. A waiver also does not convert an employment relationship into an independent contractor relationship and it does not replace the separate employment withholding regime where employment remuneration is involved.
Finally, a waiver does not remove the payer’s information reporting obligations. Even where withholding is reduced or eliminated under an approved waiver, the annual reporting of the payments can still be required using the appropriate CRA information slip framework.
If you are a non-resident working or intending to work in Canada or a Canadian business looking to hire non-residents, get in touch with us. Maroof HS CPA Professional Corporation provides comprehensive tax preparation and tax planning services to businesses in Canada.
