FROM PRINCIPLES TO PLANNING U.S. Withholding and Reporting for Payments to Non-Residents FROM PRINCIPLES TO PLANNING

FROM PRINCIPLES TO PLANNING

U.S. Withholding and Reporting for Payments to Non-Residents

FROM PRINCIPLES TO PLANNING

U.S. Withholding and Reporting For Payments to Non-Residents

Carla Smatson, Plante Moran PLLC

Chris Clifton, BKD LLPMark Pearlman, MNP LLP

Canadian Withholding Taxes and Reporting For Payments to Non-Residents

Mark Pearlman, MNP LLP

Agenda

Statutory withholdingServices in Canada - Regulation 105Employees in Canada - Regulation 102Sale of Canadian property - Section 116

Canadian Withholding and Reporting


Withholding Requirement • “Every person paying to a non-resident person a fee, commission

or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 percent of such payment”

Remitting Requirement • Remit payments no later than the 15th of the month following the

month which the payments were made to the non-resident

Reporting Requirement • Complete a T4A-NR information return and slips.

• Return is due on the last day of Feb. of the year following the year in which payments were made

Failure to Comply

• Withholding: 10% penalty + interest • Late filed T4A-NR return subject to penalties from $100 - $7,500

Regulation 105 Withholdings


Late Filing Penalty for T4A-NR, T4, and NR4 Returns

Number of informationreturns (slips) Penalty (per day) Maximum penalty

1 - 50 $10 $1,00051 - 500 $15 $1,500501 - 2,500 $25 $2,5002,501 - 10,000 $50 $5,00010,001 or more $75 $7,500

Regulation 105 Withholdings (cont’d)Types of activities subject to Regulation 105 withholding

• Construction projects;• Installation projects; • Oil and gas operations;• Consulting;• Lecturing; and• Seminar/conference presentations.


Regulation 105 Withholdings (cont’d)

Special situations where Regulation 105 applies • Payments to a Canadian branch of a foreign entity;• Payments to a joint venture or partnership.



Regulation 105 Withholding Tax Remitting Requirement • Remittance is made to payers payroll account and confuses many

payers since the payment not related to employment services

• Recommend setting up a second payroll account (i.e., RP0002) for the withholding in order that it does not get included with regular payroll withholdings


Multi-tiered Contracts• Every payer whether a resident or non-resident of Canada, is

responsible for Regulation 105 withholding on payments it makes to a non-resident in respect of services provided in Canada.


Secondment of Non-Resident Employees• A secondment is the temporary assignment of an employee from

the employer in a foreign country to a Canadian entity;• Will exist regardless of whether the employee is on payroll;• Is supported by existence of an employer/employee relationship;• Regulation 105 will not apply on reasonable reimbursements where

a secondment exists.


Factors Indicating There May Be a Secondment• The secondment and employment agreements are in writing;• The legal terms of the secondment are specified;• The receiving employer is responsible for the employee's salary and

other costs including travel and relocation; • There is no element of profit included in the charge-back to the

receiving employer by the lending employer.


Obligations of the Payer• Regulation 105 withholding must be remitted to the Receiver

General by the 15th of the month following the month in which the payment is made to the non-resident;

• The penalty is the whole amount together with any interest and penalties;

• T4A-NR Information Return is used to report all amounts paid to non-residents;

• Must be filed with the CRA by the last day of February.


Canadian Income Tax Return• Regulation 105 withholding is not a final tax; • Non-residents are normally required to file a Canadian income tax

return to calculate their tax liability or to obtain a refund;• A T2 Corporation Income Tax Return must be filed within six months

of the end of the taxation year; • T4A-NR information slip must be attached to the Canadian income

tax return.


Regulation 105 Waiver Procedures

•Two types of waiver procedures• Treaty-Based Waivers Involving Regulation 105 Withholding;• Income and Expense Waivers Involving Regulation 105

Withholding.


Income and Expense Waivers Involving Regulation 105 Withholding• Claim expenses against Canadian sourced income;• Net income being subjected to tax rather than being subject to 15%

on gross revenues; • If estimated tax payable is lower than the Regulation 105 the non-

resident person may benefit.


Regulation 102• Any person paying another person salary, wages, commissions,

bonuses, or other remuneration in respect of an office or employment in Canada must deduct or withhold, remit, and report these amounts to the CRA;

• Subject to deductions at source based on graduated rates; • These obligations extend to non-residents of Canada employing

either resident or non-resident employees for services performed in Canada.


Withholding and Remitting Requirements• Employers are required to withhold and remit ;

• Withholding tax• Canada Pension Plan contributions (CPP)• Employment Insurance Premiums (EI)

• Waiver are available and/or an exemptions provided for CPP;Failure to deduct and remit results in liability for the whole amount together with any interest and penalties.


Withholding Requirement • Any person paying a non-resident employee for services performed

while in Canada must withhold at the graduated rates

Remitting Requirement • Remittance based on filing frequency as outlined in CRA guide

T4001

Reporting Requirement • Complete a T4information return and slips.

• Return is due on the last day of Feb. of the year following the year in which payments were made

Failure to Comply

• Withholding: 10% penalty + interest • Late filed T4 return subject to penalties from $100 + $7,500

Regulation 102 Payroll Withholdings


Canadian Income Tax Return• Regulation 102 withholding does not represent a final tax; • Non-resident employees are normally required to file a Canadian

income tax return to calculate their tax liability or to obtain a refund;

• T1 Individual Income Tax Return must be filed by April 30th of the following calendar year.


Waiver

– Following criteria must be met:• 1) The total remuneration does not exceed CAN$10,000 in the calendar year

in which the employment is exercised in Canada;– OR

• 2) The employee is not present in Canada for a period or periods exceeding 183 days in the calendar year;– AND

• The remuneration is not borne by:– a) an employer who is a resident of Canada,

» OR– b) a permanent establishment or fixed base which the employer has in

Canada.


Withholding Tax on Dividends, Rents, Royalties, Interest Withholding Requirement • Any person paying a non-resident a dividend, royalty, interest,

pension, estate income, trust income, or rents from movable or non-movable property is required to withhold the appropriate tax based on the rates in the U.S.-Canada Tax Treaty

Remitting Requirement • Remittance is due by the 15th of the follow month the payment was

made

Reporting Requirement • Complete a NR4 information return and slips.

• Return is due on March 31st of the year following the year in which payments were made

Failure to Comply

• Withholding: 10% penalty + interest • Late filed T4 return subject to penalties from $100 - $7,500


Part XIII Tax

– Certain payments to a non-resident are subject to 25% withholding tax (subject to available reductions under applicable treaties)• Dividends

– Withholding rate reduced to 5% / 15%• Royalties

– Withholding rate reduced to 10%• Management Fees

– Withholding rate reduced to 0%• Interest

– Interest rate reduced to 0%


Determination of Withholding Tax Rate for Various Types of U.S. Taxpayers

• Under the Canadian Income Tax Act the withholding tax is 25% on payments subject to Part XIII Tax

• Canada-U.S. Tax Treaty reduces the rate

• Canadian payer may request that the non-resident complete a Declaration of Eligibility for Benefits Under a Tax Treaty for a Non-Resident Taxpayer (NR301, NR302, NR303) before withholding at the reduced rate under the Treaty


Determination of Withholding Tax Rate for Various U.S. Entities

S Corp

• For Canadian purpose the S-Corp is considered a Corporation and withholding tax rates under the U.S.-Canada Tax Treaty for corporations apply

Partnerships

• In order to determine the withholding tax rate the CRA looks through to each partner in order to determine the rate of withholding


Partnership Example

ABC Partnership

Can Corp

Machada Corp(Bahamas)

Edmundo Ruiz(Spain)

John Chen(Taiwan)

Mary Smith(Canada)

Dividend

15

15 55

15


Partnership Example (cont’d)• ABC Partnership expects to receive dividend payments from a Canadian

corporation. To receive a reduced treaty rate, ABC Partnership completes Form NR302 and provides it to Canadian corporation.

• The effective rate of withholding in respect of dividends is based on the following considerations:• Machada Corporation is not eligible for treaty benefits as no treaty between

Canada and the Bahamas• Edmundo Ruiz is eligible for the reduced treaty rate of 15% as a result of Article

X of the Canada – Spain tax treaty. • John Chen is not eligible for a reduced rate as no treaty exists between Canada

and Taiwan• Mary Smith is a Canadian resident. She will report the dividend income on her

T1 income tax return. There is no withholding tax on dividends paid to residents of Canada


Partnership Example (cont’d)• The effective rate of Part XIII withholding on dividend payments to ABC

Partnership is 19.75%. This is the rate that the Canadian Corp needs to withhold when paying dividends to the partnership.

Machada Corporation 15% allocation x 25% Domestic Rate = 3.75% Edmundo Ruiz 15% allocation x 15% Spanish Treaty Rate = 2.25% John Chen 55% allocation x 25% Domestic Rate = 13.75% Mary Smith 15% allocation x 0% Domestic Rate = 0.00%

Total19.75%


Part XIII Tax - Rent

• Where a non-resident rents property in Canada, a 25% withholding tax applies on the gross rental payment;

• Form NR6 can be used to apply the 25% withholding tax on the net rent;

• A Canadian tax return is required to be filed electing under section 216 to have the 25% withholding tax apply on the net rent.


Section 116

• Applies to non-residents (vendor) who dispose of Taxable Canadian Property (TCP)• Vendor notification to the CRA of the disposition• Purchaser withholding/remittance to the CRA• Vendor may be obligated to file a Canadian income tax return


Section 116

• TCP• Real or immovable property• Canadian resource property• Most property used in a business carried on in Canada• Shares (if >50% of value from Canadian real property)• Partnership interest (see shares above – same test)

• Excluded Property• Stock of a corporation listed on a designated stock exchange• Units of mutual fund trusts• Bonds, debentures, mortgages


Section 116

• Vendor Notification Obligation• Applies to disposition of TCP• Not applicable on dispositions of excluded property (e.g. publicly

listed shares), and some treaty-protected property• Applies even if no gain is realized• Required if obtaining a certificate of compliance• Deadline is 10 days after disposition• Penalty for failure to notify


Section 116

• Purchaser Withholding/Remittance Obligation• Purchaser required to withholding 25% of sale price (50% in some

cases), whether or not vendor realizes any gain or owes tax;• A certificate of compliance may reduce the amount required to

be remitted to the CRA;• Arm’s length purchasers often insist on certificate of compliance.


Section 116

• Vendor Tax Return Filing Obligation• Where Part I income tax is owing for the year, a return is required• Necessary to file to claim a refund

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

IRS Circular 230 Disclosure

Questions?

Contact Information

Carla Smaston, Plante Moran, PLLC [email protected]

Chris Clifton, BKD [email protected]

Frank Kacsandi, MNP [email protected]

mailto:[email protected]



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FROM PRINCIPLES TO PLANNING U.S. Withholding and Reporting for Payments to Non-Residents FROM PRINCIPLES TO PLANNING