Regulation 102 – Withholding on Payments to Non-Residents Employees
Regulation 102 of the Income Tax Regulations, under paragraph 153(1)(a) of the Income Tax Act, applies to any person or entity (including non-resident employers) who pays salary, wages or other remuneration to an employee for services performed in Canada.
Pursuant to Regulation 102, the employer is required to withhold and remit income tax on the portion of remuneration related to services performed in Canada. This obligation applies regardless of whether the employee is a resident or non-resident of Canada. The amount to be withheld is calculated using the same prescribed rates and payroll deduction tables applicable to Canadian resident employees and must be remitted to the Receiver General by the 15th day of the month following the month of payment. Failure to withhold or remit the required amounts may result in the employer being held liable for the full amount, along with interest and penalties.
Withholding under Regulation 102 is mandatory unless a waiver is obtained from the Canada Revenue Agency (CRA). Waivers can be applied for on an employee by employee basis. There is also a simplified waiver available by submitting Form RC473 – Non-Resident Employer Certification. This waiver application must be based on an applicable tax treaty between Canada and the employee’s country of residence. To qualify, the following high-level criteria must be met:
- Both the employer and employee must be residents of a country that has a tax treaty with Canada.
- The employee must either work in Canada for fewer than 45 days in the calendar year including the payment date or be present in Canada for fewer than 90 days in any 12-month period that includes the payment date.
- The remuneration must not be borne by a Canadian employer or permanent establishment in Canada.
If you are planning to send employees to perform services in Canada, please connect with your advisor to understand the approach to consider including advisable waivers to put in place.
Regulation 105 – Withholding on Payments to Non-Residents for Services in Canada (UPDATE)
Regulation 105 of the Canadian Income Tax Regulations requires any person or entity—whether resident or non-resident of Canada—that pays a non-resident for services performed in Canada to withhold and remit 15% of the gross amount to the CRA. This applies to all forms of compensation, including fees, commissions, and payments made through agents, subcontractors, or third parties.
In 2024, the CRA revised its position regarding reimbursements for subcontractor fees. Effective for payments made on or after September 30, 2024, these reimbursements were no longer exempt from Regulation 105 withholding. This meant that even pass-through payments to subcontractors were subject to the 15% withholding tax. The only exception was reimbursements for travel and meal expenses, which continued to be exempt provided they were clearly identified in a written agreement and properly documented.
This change raised concerns among non-resident firms, particularly when subcontractors are also non-residents, as it could lead to multiple layers of withholding and significant cash flow challenges.
In response to stakeholder feedback, including input from the Joint Committee on Taxation, the CRA has agreed to temporarily reinstate its previous administrative position, effectively providing relief from the new withholding requirement. Under this relief, reimbursements for subcontractor fees will remain exempt from Regulation 105 withholding until June 30, 2026. CPA Canada continues to actively engage with the CRA to seek a permanent, workable solution to this issue.
To summarize, the CRA’s prior administrative relief has been temporarily reinstated, allowing reimbursements for subcontractor fees to remain exempt from Regulation 105 withholding until June 30, 2026. After that date, unless further relief is granted, these fees, including reimbursements—may become fully subject to withholding.
SLF will continue to monitor developments and issue updated guidance promptly if there are any changes to these rules.
Key Considerations:
• 15% withholding applies to all payments made to non-residents for services performed in Canada, including those involving subcontracted work.
• Under the CRA’s temporary administrative relief, reimbursements for subcontractor fees remain exempt from withholding until June 30, 2026, provided they are clearly documented.
• Travel and meal expense reimbursements are exempt, if specifically identified in an agreement and properly supported.
• This is not a final tax—if appropriate, non-residents may file a Canadian corporate income tax treaty-protected return to determine actual liability and claim any refund of the taxes withheld pursuant to Reg 105.
• Proper documentation and timely remittance are critical to ensure compliance and avoid penalties.
We recommend reviewing all arrangements involving non-resident service providers. For guidance on Regulation 105 or to assess whether it applies to your situation, please contact us.