Non-Resident Withholding Tax
I. Withholding Tax, and Related Risks
Under the Canadian Income Tax Act (the Act) and regulations, a non-resident of Canada is generally taxable on its income attributable to services provided in Canada. If the University makes a payment to a non-resident contractor for services provided in Canada, the University must typically withhold 15% of the gross amount paid, and remit it to the federal government. This percentage is commonly known as ‘withholding tax’. It represents an amount due by the non-resident contractor for its income taxes in Canada. In effect, the University is acting as income tax collector for the government.
The law also sets deadlines on remittances by the University, and prescribes paperwork to be filed, in relation to withholding tax. The alternative to these requirements is for the non-resident contractor to obtain a waiver, or a reduction in the withholding tax. If a non-resident contractor has not provided SFU with a waiver or other relevant written notification issued by the Canada Revenue Agency (CRA), the University’s withholding tax obligations apply. If the University fails to deduct or remit required withholding tax, CRA may hold the University liable for that amount, plus penalties and interest.
“Residency” can be a complex concept under income tax law, especially for corporations; tax treaties, court rulings, multiple variables and special inclusions/exclusions add complexity. Procurement Officers are not responsible for interrogating a contractor and independently determining whether the contractor is a resident or non-resident of Canada, for income tax purposes. Instead, Procurement Officers are responsible for asking the contractor to disclose its status; if necessary, the contractor would determine its status based on advice from its own tax advisors, and/or CRA. Further responsibilities of Procurement Officers will depend on the status of the contractor (as disclosed by that contractor) and by other factors, as outlined below.
II. Withholding Tax-Related Responsibilities when Engaging a Contractor
After signing a contract but before making the first payment to the contractor:
- The Procurement Officer should confirm with the contractor that it is a resident of Canada for income tax purposes. An email exchange with the contractor is sufficient. If the contractor confirms its residency in Canada, nothing more need be done.
At any time prior to or during the term of the Contract:
- If the contractor notifies the University that it is a non-resident of Canada for income tax purposes, or if the contractor provides a waiver or other relevant notification from CRA the Procurement Officer must notify Payment Services immediately. Payment Services would make (or discontinue) any necessary withholdings, remittances and filings.
CAUTION: This summary is intended to cover common situations and risks relating to withholding tax issues, in Canada; it is not a comprehensive summary of the Act, or related regulations, tax treaties, tax rulings, or other authorities, and it does not cover multi-jurisdictional issues. For more details, or if a situation arises in relation to a particular contractor which is not discussed in this summary, consult the Canada Revenue Agency website; contact the Vancouver tax services office, and/or consult with SFU Legal.