The end of Regulation 105 administrative relief: Required withholding from amounts paid to non-residents providing services in Canada

This article was prepared with the assistance of summer student Nia Sharma.

As of June 30, 2026, the administrative relief regarding Regulation 105 of the Income Tax Act (Canada) is coming to an end. The relief was put into place when the CRA revised its position on the matter and introduced requirements for businesses to withhold 15% of fees paid to a non-resident service provider. The Regulation was implemented to ensure that non-residents providing services in Canada, such as subcontracting, pay the appropriate amount of Canadian taxes. The administrative relief in relation to the implementation of the Regulation was extended as a transitional measure meant to allow taxpayers time to adapt their payroll and compliance processes to align with the revised policy.

Overview of Regulation 105

Section 153(1)(g) of the Income Tax Act (Canada) requires those paying fees, commissions or other amounts for services to deduct or withhold the amount determined under applicable prescribed rules and remit it at the prescribed time. For non-resident service providers, the prescribed rule is Regulation 105.

Regulation 105 under the Income Tax Act (Canada) generally requires a 15% withholding from amounts paid to a non-resident for subcontractor services rendered in Canada.

It is the responsibility of the payor to determine whether payment is being made to a non-resident and consequently to withhold the appropriate amount, if necessary. The regulation applies to all individuals, corporations, participants in joint ventures or members of partnerships who are non-residents of Canada but are providing services within the country.

If one is unsure if they are dealing with a non-resident service provider, they should err on the side of caution and withhold the 15% as a precaution. A negligent payor will still be responsible for both the withholding amount and interest/penalties. A non-resident service provider could be indicated by:

• A foreign currency as the requested payment
• Non-resident employees performing the work for the entity
• A foreign address on the contract, purchase order or other relevant documentation
• Payments made to, or care of, a post office box

Determining whether Regulation 105 applies

The basic questions which should be used in determining whether payment to non-residents falls under this category are:

• Is the payee a non-resident of Canada?
• Is the payment for services rather than employment remuneration?
• Are services rendered in Canada, in whole or in part?

The regulation applies broadly to both resident or non-resident payors paying a non-resident for work done in Canada, and each member of a partnership is responsible for the withholding. The payment does not need to be made directly to the person who physically performed the services. Payments for services provided in Canada by non-residents, other than those paid in respect of an office or employment, still fall under Regulation 105. Additionally, the Regulation applies to advance payments for services to be rendered in Canada once they are paid.

The withholding base includes the amount paid to the non-resident, even if the non-resident subcontracted the work to another person. The fact that the non-resident used a subcontractor does not reduce the amount subject to Regulation 105. This is because the payor’s obligation arises under its own contract, and the amount paid is considered the non-resident’s income that may be taxable in Canada. Any payment from the non-resident to a subcontractor is a separate downstream payment and does not change the character of the original payment from the Canadian payor to the non-resident.

Tax treatment of withholding under Regulation 105

If established that the Regulation applies, the required 15% withholding is not a final tax – it is treated like an advance tax prepayment. The money can be returned to the non-resident, provided they file a Canadian tax return and prove they are not subject to the withholding. If your calculated Canadian tax liability equals or exceeds the amount withheld, you will not receive a refund.

As stated, to claim the money, the non-resident must claim a formal Canadian Income Tax Return. When the non-resident’s income tax return is assessed, the CRA determines if:

• The withholding amount is sufficient
• There is additional tax owing
• A refund is to be issued if the withholding amount exceeds their tax liability.

Amounts must be remitted by the 15^th day of the month following the month of payment to the non-resident, and the payor must file a T4A-NR reporting amounts paid for services rendered in Canada by the last day of February in the year following the year in which the amounts were paid. A copy of this slip must be issued to the service provider.

There are two qualifications which could affect the application of the Regulation, even if other factors align with the determination of its application. First, if the services are performed partly inside and partly outside Canada, only the portion reasonably allocable to services rendered within Canada is subject to the Regulation. If the allocation is not properly documented, the CRA recommends withholding the entire amount. Second, reimbursements of travel (to a reasonable degree), accommodation and meal expenses are generally treated differently from service fees. As long as the payor agreed to reimburse such costs, they are generally not subject to the Regulation.

Possible workarounds to Regulation 105

The main workarounds are statutory mechanisms, as these make it possible to avoid or reduce the withholding tax. The payor may apply for a waiver in cases where the normal withholding would exceed the non-resident’s total Canadian tax liability. Waiver applications are to be submitted 30 days before either the services begin in Canada or the initial payment is made. These applications may be accepted; however, the waiver will only apply to payments made after the waiver is issued, not retroactively. To calculate their tax liability or to obtain a refund, service providers must submit either a T1 or T2 Canadian income tax return. Absent a waiver in place before payment, the payor must withhold the 15% as required.

Service providers should note that they remain responsible for withholding, remitting and reporting any secondary withholding tax on payments to non-resident subcontractors, even if they have received a waiver themselves. Additionally, regardless of waiver or reduction of withholding, the payor still must file a T4A-NR reporting the amounts paid for services.

The two types of waivers are Treaty-Based Waivers and Income and Expense Waivers:

Treaty-Based Waivers

For a Treaty-Based Waiver to apply, the non-resident’s home country and Canada must have a tax treaty which, based on entitlement to treaty benefits, exempts the non-resident from Canadian taxes. An example would be the Canada-U.S. Tax Treaty, which states that a U.S. business is exempt from Canadian income tax unless it has a permanent establishment in Canada (such as an office, factory or warehouse) or its employees are present in Canada for longer than 183 days.

Treaty exemptions are available to service providers who provide services in Canada but have no permanent establishment in the country. If this can be proven by the non-resident, then the 15% withholding is more than they are liable for and a waiver may be provided. These waivers are not automatically provided however; the waiver process must be followed for them to apply.

Income and Expense Waiver

For an Income and Expense Waiver to apply, the resident must live in a country not involved in a tax treaty with Canada and their estimated income and expenses must result in a tax liability that is lower than the required withholding amount. Specifically, if a non-resident can prove, using an estimated income and expense statement, that their ultimate Canadian tax liability is lower than 15% of their gross service fees, this waiver is applicable.

Key takeaways

We hope this overview provides a helpful summary of Regulation 105 and the compliance issues businesses should consider as the administrative relief period draws to a close. While Regulation 105 serves an important compliance function, applying it in practice is not always straightforward. If you or your business has questions about whether withholding is required – or if you need assistance with Regulation 105 more generally – please contact one of our tax advisers who would be more than happy to assist you.

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