In the age of free trade and globalization, even small businesses find themselves dealing with foreign partners for many different types of transactions. If you are a Canadian small business owner and you are thinking about hiring a foreign contractor to perform certain services for you, there are several tax implications involved.
Where Will the Services Be Rendered?
Where will the foreign contractor render services – in Canada or elsewhere? As a general rule, if a non-resident of Canada renders services outside of Canada, then there are no tax obligations even if the person receiving the services is Canadian.
For example, if you hire a lawyer in France to represent you before the French courts to collect money from a buyer who is refusing to pay you, you don’t need to withhold money at source, since the French lawyer is not a resident in Canada and the services are being rendered in France.
However, if the same French lawyer comes to Canada and renders service to you on Canadian soil, such as an expert witness in a Canadian court case, then the answer may be different and you may need to withhold part of the payment.
Canadian Withholding Taxes
Canadian taxation of non-residents is different than that of residents. Canadian residents file an annual income tax return and include all of their worldwide income, then calculate the tax payable. If amounts have been withheld at source, as by an employer, they are then credited and the Canadian taxpayer pays the difference or receives a refund.
For non-residents, every payment received is subject to a withholding by the Canadian payer and that withholding represents the final tax for the non-resident, who may then get a foreign tax credit in his country of residence.
As far as services rendered in Canada by non-residents are concerned, the general rule is that every payer who makes a payment to a non-resident of Canada for such services must withhold and remit an amount of 15 percent of the gross amount paid. As a Canadian payer, if you neglect to withhold the amount, you can be liable for the non-resident’s taxes.
There are several exceptions to the above rule, many of which are found in Canada’s tax treaties. However, the exemptions are not automatic, and you must apply to the Canada Revenue Agency for the exemptions. The most common waiver for small businesses is a Section 105 waiver, which can be granted to foreign contractors who live in a country with whom Canada has a tax treaty and who meet one of the following criteria:
The non-resident is an individual who earns less then $5,000 for the current year.
The non-resident person’s presence in Canada is not recurring, and the person performs services in Canada for less than 180 days under the current contract.
The non-resident person’s presence in Canada is recurring, but the person’s cumulative presence is less than 240 days during a given period and less than 180 days under the current contract.