The Canada Revenue Agency (CRA) has announced a revised stance on the withholding tax for subcontractor fees reimbursed to non-residents for services performed in Canada.
Previous position:
In a 2008 CRA document, the CRA stated that Regulation 105 withholding tax would generally not apply to the reimbursement of a non-resident’s expenses, including subcontractor fees and travel costs, for services rendered in Canada, as long as the reimbursement information was available and documented at the time of payment to the non-resident.
However, in a 2019 CRA document, the CRA revised its position, concluding that advance payments made by a Canadian resident corporation to a non-resident corporation for services performed in Canada by a subcontractor would be subject to Regulation 105 withholding tax (15 per cent deduction of the payment). The CRA clarified that the fact the non-resident corporation subcontracted its obligations did not change the fact that it was paid for services rendered in Canada. Nonetheless, the CRA confirmed that Regulation 105 withholding tax would not apply to amounts paid to a non-resident for the reimbursement of travel costs incurred by the non-resident subcontractor for services performed in Canada.
New position:
On July 3, 2024, in a recent external technical interpretation, the CRA clarified that fees paid by a Canadian resident corporation to a non-resident corporation as reimbursement for subcontractor services conducted in Canada are subject to withholding tax. This update reverses the previous position held since 2008. The new position will apply to all reimbursements of subcontractor fees made after September 30, 2024.
Employers/payers will need to:
- Review their agreements with non-resident contractors to specify that withholding tax will apply to reimbursements of subcontractor fees for services performed in Canada.
- Report the subcontractor fees on a T4A-NR slip.