2024-1038271C6 2024 CTF Conference - Q.9 Regulation 105

Principal Issues: In light of CRA's new position expressed in CRA document 2022-0943241E5, please clarify CRA's new position on the application of Regulation 105 in the hypothetical situation with respect to fees paid to a non-resident for services rendered in Canada.

Position: The fees paid by Canco to NRCo, to the extent such fees are in respect of services performed in Canada, are subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105.

Reasons: Based on position expressed in CRA document 2022-0943241E5.

Author: Argento, Angelina
Section: 153(1)(g) and Regulation 105

2024 CTF Annual Conference

CRA Round Table

Question 9 – Regulation 105


In CRA document 2022-0943241E5 (2022-0943241E5), the CRA changed the position expressed in document 2008-0297161E5 and provided a new position on the application of Regulation 105 to services billed by a non-resident for services rendered in Canada. 

Could the CRA clarify its new position in the following hypothetical situation? A Canadian taxpayer (“CanCo”) engages a non-resident (“NRCo”) to provide services to be rendered in Canada. NRCo subcontracts part of the services rendered to CanCo in Canada to another corporation (“SupplierCo”).

CRA Response

The purpose of paragraph 153(1)(g) is to collect a reserve of tax that is applied towards a future income tax liability.

In 2022-0943241E5, the CRA indicates that a person paying fees to a non-resident is required to withhold on the entire amount of the “fees, commissions or other amounts” paid for services rendered in Canada, including the portion equal to the amount paid by the non-resident to a subcontractor.

In determining the Regulation 105 withholding requirements, the contractual obligations between the parties must be respected. In the example above, SupplierCo has a contractual obligation to provide its services to NRCo and NRCo has a contractual obligation to provide services to Canco. The fee paid by CanCo with respect to services rendered in Canada is in satisfaction of its obligation to pay NRCo and Canco has no contractual obligation to SupplierCo.

The standard set by the judge in Weyerhaueser (footnote 1) was whether the payment had the quality of income. As mentioned in 2022-0943241E5, pursuant to paragraph 2(3)(b) and subject to the application of an Income Tax Convention with Canada, the non-resident is subject to tax in Canada on its taxable income earned in Canada as determined under section 115. On that basis, the amount that is “potentially subject to tax in Canada” which is subject to withholding pursuant to paragraph 153(1)(g) of the Act and Regulation 105 is the gross income or revenue of the non-resident recipient (NRCo).

In this context, income is to be given the meaning given in paragraph 20(1)(c) by the Supreme Court of Canada in the Ludmer decision (footnote 2) , i.e. gross income or revenue. That reading is consistent with the conclusion in 2022-0943241E5 and the nature of the payments on which Regulation 105 imposes withholding (“fees, commissions or other amounts paid”). 

The CRA’s view is that the decision of the Court in Weyerhaeuser stands for the proposition that the reimbursement of travel and meal expenses is not subject to withholding pursuant to Regulation 105 in situations that are similar to the situations in that decision.

As pointed out in 2022-0943241E5, if SupplierCo is a non-resident, then payments from NRCo to SupplierCo may also be subject to Regulation 105 withholding.

The system put in place in the Act to manage circumstances where hardship might exist is in subsection 153(1.1). Two types of waivers exist to reduce the amount of Regulation 105 withholding tax a person must pay: a treaty-based waiver, or an income and expense waiver. For more info on these waivers see: How to complete Form R105, Regulation 105 Waiver Application - Canada.ca. The draft legislation released on August 8th, 2024 proposed the introduction of a broader class of waivers.



Angelina Argento
2024-103827
December 3, 2024

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Weyerhaeuser Company Limited v The Queen 2007 TCC 65

2 Ludco Enterprises Ltd. et al v The Queen 2001 SCC 62 at paragraph 63.

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2025

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2025