Withholding Tax Problems for Non-Residents Can Arise When Register for GST/HST and Tick Box "Carrying on Business in Canada"
I have seen an increase in Regulation 105 withholding tax audits recently and non-residents registered for GST/HST are affected. The withholding tax audits are usually audits of Canadian companies who make payments to non-resident suppliers (often from the United States). The cases I have seen recently involve a non-resident who provides services to the Canadian company at the a Canadian location. Often, the contract calls for the Canadian company to reimburse the non-resident supplier for expenses incurred during the delivery of the services (e.g., the travel costs). More recently, the Canadian business asks the non-resident to register for GST/HST purposes so that the non-resident can remove imbedded GST/HST in the agreed disbursements. With the implementation of HST, the disbursement costs have increased. When the non-resident voluntarily registered for GST/HST, they checked the box on the registration form that they are carrying on business in Canada.
In many cases, when a Canadian business pays an amount to a non-resident business, the Canadian business must withhold a percentage specified in an tax treaty (the withholding tax) and remit that amount to the Canada Revenue Agency. For example, if a U.S. company provides services to a Canadian company, the withholding tax rate would be 15%. The Canadian business provides the non-resident with the requisite forms and the non-resident takes steps to get the money back from the Canadian Government. It is beyond the scope of this blog posting to cover all the withholding tax rates of Canada and all the exceptions and the steps to pay and recover withholding tax. What is clear is that many Canadian companies do not withhold and get audited and assessed.
My reason for posting this blog article is to communicate to non-residents that the administrative task of completing a GST/HST registration form establishes a paper trail for non-residents and a simple answer relating to one Canadian tax may result in non-so-simple issues regarding another Canadian tax. Please ask questions of an experienced Canadian tax lawyer.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
