According to Regulation 105 of the Income Tax Regulations if you’re a corporation based outside of Canada and doing business within Canada you might be charged ITR105 withholding tax on your invoices. This blog explores the implications Regulation 105 entails and how a waiver can be obtained for withholding tax.
Before we go any further, please note, that the tax implications for non-resident corporations employing individuals in Canada are discussed separately in another blog post about Regulation 102.
Non-resident corporations are liable to pay taxes on their income derived from business activities conducted in Canada and from any Canadian property they sell. When it comes to business income if a non-resident corporation is a resident of a country with which Canada has a tax treaty agreement it’s generally only taxable by Canada on profits earned through a permanent establishment within Canada. However, if the business is conducted in Canada without such an establishment it falls under treaty protection.
As per Regulation 105, if a non-resident corporation carries out business in Canada and receives payment for the services provided within the country, they are subject to withholding tax of 15% for Federal and 9% for Quebec. The payor corporation has to pay the withholding tax to the Canada Revenue Agency on behalf of the non-resident unless the non-resident qualifies for a treaty protection and obtain a Regulation 105 waiver.
Regardless of whether a waiver is granted, it is mandatory for a Canadian payor to submit a form T4A-NR information return to the CRA reporting all payments made to non-residents for services rendered in Canada. If a non-resident received payment after deducting ITR 105 withholding taxes for services provided in Canada and falls under treaty protection, they can claim a refund of these withholding taxes by filing a treaty-based corporate tax return (T2). However, on the level, we have subsection 164(1) which states that corporations seeking refunds for overpaid taxes usually have three years from the end of the tax year to file an income tax return. If this deadline is missed, then their right to claim refunds expires.
In conclusion, if a corporation that is not based in Canada conducts business, it may have to fulfill many more filing obligations. Failing to submit these filings on time can result in penalties. It’s advisable to consult with a professional to ensure compliance and reduce tax liabilities. Reach out to us at info@ictax.ca
