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Obligations of Payers regarding payments made to Non-Residents of Canada for Services provided in Canada

15/03/2011


Payments Related to Services

Canadian Income Tax Regulation 105 requires that any person paying amounts in connection with services rendered in Canada by a non-resident must withhold at source 15% of the total payment(s) and remit these withholdings to the Canada Revenue Agency (“the CRA”), unless the non-resident presents the payer with a waiver from the CRA.

Within the context of the Canadian income tax legislation, “person” includes not only individuals but also corporations, partnerships, trusts and all other types of organizations, even if they are exempt. In addition, “person” includes not only Canadian resident payers but also non-resident payers if they are making payment(s) in connection with services, whether employment or non-employment related, performed in Canada.

Payments Related to Employment Services

Rules similar to those under Regulation 105 for services performed in Canada (i.e. withholding and remitting) apply to persons making payment(s) or performing employment related services in Canada under Income Tax Regulation 102 (“Regulation 102”), with some notable differences.

  1. Instead of a flat percentage, the rate of withholding for tax is at “graduated” rates. The rate of required withholding at source varies with a recipient’s income level.
  2. In addition to tax, payers may also be requires to withhold at source amounts relating to Canadian social security, referred to in the relevant Canadian legislation as Canada Pension Plan (“CPP”) contributions, and Employment Insurance (“EI”) premiums.

These rules with respect to employment related services apply not to only Canadian residents who may be hired by non-resident employers in Canada, but also employees of non-resident employers who may be sent to Canada, even temporarily in connection with services. The only time a payer is not required to withhold tax on the portion of the employee’s earnings earned in Canada is when the employee presents the payer with a waiver from the CRA exempting the earnings Canadian withholding taxes.

Remitting Requirements

Amounts withheld under Regulation 105, Regulation 102, CPP contributions, and/or EI premiums must be remitted to the CRA no later than the 15th of the month following the month in which the payment(s) were made to the resident or non-resident recipient. However, if it has been previously determined that the payer is an “employer” to whom the accelerated remitting provisions apply, the withholding at source must be remitted by such earlier date as has been determined.

Information Return Reporting Requirements

All payers are required to complete an information return (consisting of a separate slip for each recipient plus a summary) with respect to the payments made to the resident or non-resident recipients, then to file this return with the CRA and to provide recipients with a copy of the slips pertaining to them.

The type of information return will differ depending on the nature of the income received by the resident or non-resident recipients:

  1. Non-employment related services: T4A-NR slips and information return
  2. Employment related services: T4 slips and information return;
  3. Other related payments: NR4 slips and information return.

The payer is required to the T4 and/or T4A-NR information return, as applicable by the last day of February of the year following the year in which the payments were made, or within 30 days of ceasing activity in Canada, whichever comes first. The payer is also required to file the NR-4 information return by March 31st of the following year in which the payments were made.

Failure to Comply

Payers who fail to comply with the withholdings under Regulation 105 and Regulation 102 and/or remitting and/or information return reporting requirements as outlined above will be subject to the full amount of the unremitted withholdings, penalties for failure to withhold, penalties for failure to remit and/or penalties for failure to file an information return, plus interest on the unremitted withholdings.

What Does This All Mean?

A payer should always ensure that they are aware of the withholding requirements on payments to non-residents, as well as their reporting obligations. For more information, please consult your local MNP Tax advisor.

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