Payments to non-residents for services rendered in Canada

Anyone making payments to non-residents for services rendered in Canada (other than in the course of employment) must withhold and remit tax at a rate of 15%. However, the service provider can reduce or eliminate the withholding tax if they have obtained a treaty-based or income-and- expense waiver from the CRA. Failure to deduct and remit this tax to the CRA can make you liable for the outstanding amount, plus interest and penalty.

The 15% withholding tax applies to a fee, commission or other amount paid to a non-resident individual, partnership or corporation with respect to services rendered in Canada other than in the course of regular and continuous employment.

Non-residents who are employed in Canada are subject to withholding tax deductions in the same manner as Canadian residents (i.e., using graduated tax rates) unless the employee has obtained a treaty-based exemption. To obtain this exemption, the employer and employee must file a joint waiver application form at least 30 days in advance with the tax services office for the area where the services will be provided.

The 2015 federal budget proposes relief from the withholding tax requirement for amounts paid by a “qualifying non-resident employer” to a “qualifying non-resident employee.” Certain conditions must be met by both the employer and employee in order to qualify, and the non-resident employer must be certified by the Minister of National Revenue as a “qualifying non-resident employer” at the time of payment. The 2016 federal budget confirmed the new government’s intention to proceed with this proposal, which is effective for payments made after 2015.

Tax tip: If you make payments to non-residents for services rendered in Canada and fail to comply with the withholding requirements, you may be liable for significant penalties and interest in addition to the 15% withholding tax. Amounts should be withheld and remitted on any payments to a non-resident unless a waiver has been obtained.