Withholding tax

The payer carries the responsibility

Payroll deductions are one kind of withholding, covered under payroll remittance. This entry looks at the other common case, paying a person or company that is not a resident of Canada. Non-residents are generally subject to a 25% tax on amounts that fall under Part XIII, such as interest, dividends, rent, pensions and royalties. As the payer or withholding agent, you must withhold and remit the correct amount.

A treaty or the Income Tax Act can reduce that 25% or exempt the payment. Generally, interest paid to someone you deal with at arm’s length is exempt from Canadian withholding. The CRA tells payers to check the Income Tax Act first, then confirm whether a treaty gives a lower rate, and to keep checking because treaties change.

Paying a non-resident for services

A separate rule applies to fees for services performed in Canada. Under Regulation 105, a person paying a non-resident a fee or commission for services rendered in Canada must withhold 15%. Employment remuneration is treated differently. The CRA describes this 15% as a payment on account of the non-resident’s possible Canadian tax, not necessarily the final tax. A non-resident who can show the withholding is too high, for example because treaty protection applies, can apply to the CRA for a waiver or reduction. Unless the non-resident gives you a CRA letter authorizing that, you withhold the usual 15%.

Treaty terms change over time, so confirm current rules before paying a foreign contractor.

An illustrative example

Suppose an Ontario business pays a non-resident consultant $10,000 for work performed in Canada. Absent a waiver, 15%, or $1,500, would be withheld and remitted, and the consultant would receive $8,500. If the consultant did the work outside Canada, this rule would generally not apply to that part. These numbers are illustrative only, and the facts of the work decide the outcome.

Remitting and reporting

Non-resident tax must reach the CRA by the 15th day of the month after the month you paid or credited the amount. You then report it on NR4 slips and an NR4 Summary, due by the last day of March following the year. If too little was withheld, the CRA can assess the payer, the recipient or both, plus interest and a penalty on the payer.

Collecting a written declaration of residency and treaty eligibility before paying, such as Form NR301 for treaty claims, helps show you were reasonably careful.

What to discuss with your accountant

Before the first payment, ask what the payment is, where the work is done, where the recipient resides and whether a treaty or waiver applies. Keep contracts, declarations, remittance records and NR4 filings together.