Invoices From Outside Canada: Deduction, GST/HST, Withholding

Can I deduct invoices from outside Canada?

Generally yes. A business can deduct a cost incurred to earn business income, to the extent it is reasonable and the records support it (Income Tax Act, s. 18 and s. 67). The CRA expects each claim to rest on an invoice, receipt or other voucher (CRA: business expenses). A foreign address on the invoice does not change that. A capital purchase, such as equipment or software the business keeps as an asset, generally cannot be deducted in full at once (s. 18(1)(b)); it is claimed over time. See capital cost allowance.

Three separate tests then apply to the same payment. Passing one says nothing about the others.

This guide is about services, software and licences bought from outside Canada. For goods that cross the border, see GST on imports and customs invoices.

A payer that should have withheld tax and did not is liable for that tax, plus interest and penalties (CRA circular IC75-6, paragraph 41). A case stops being simple when any of these is true:

• The contractor did any part of the work in Canada.
• The payment is for a licence or right to use something, not for work done.
• You pay through a platform or agency, so the money does not go to the person who did the work.
• The payee is a relative, a shareholder or a company you control.
• Most of your sales are exempt from GST/HST.
• You have paid overseas suppliers for years, or in large amounts, without checking any of this.
• The CRA has already asked about the claims.

Gather the invoices, the contract or statement of work, proof of each payment, where each piece of work was done, and any tax or GST/HST number the supplier gave.

What proof does the CRA expect for an invoice from outside Canada?

The same proof as for any business expense: an invoice, receipt or other voucher, plus cancelled cheques if your bank returns them. The CRA says receipts should include the vendor's name and the date, and its page sets no separate rule for a foreign invoice (CRA: business expenses).

For each foreign payment, keep the invoice (supplier, date, description, amount, currency), the contract or messages showing what you ordered, the bank, card or platform record of payment, the delivered work, and a note of where it was done.

Records and supporting documents are generally kept six years from the end of the last tax year they relate to (CRA: where to keep your records). Where and how to keep them is in how long to keep business records. Download each invoice into your own files instead of relying on a supplier's portal. If one is already missing, see business expenses without receipts.

Which exchange rate converts the invoice, and what if my card statement shows Canadian dollars?

For income tax, convert at the spot rate for the day the amount arises: the Bank of Canada rate for that day, or the closest earlier day with a quote (Folio S5-F4-C1, paragraphs 1.3 and 1.4). The folio generally accepts another source if all seven of its conditions are met, including that the rate is published by an independent provider, used for your financial statements and used consistently from year to year (paragraph 1.6).

For GST/HST, the CRA's memorandum lists more sources, including the Bank of Canada, a Canadian chartered bank and the source used for an actual conversion. The source must be documented and used consistently for a reasonable period, such as one year (GST/HST Memorandum 3-6, paragraphs 13 to 15 and 21).

An invoice issued in Canadian dollars needs no conversion. The folio does not address card statements. For income tax the default is the Bank of Canada rate, and a card issuer's rate is another source that must meet the seven conditions. For GST/HST the memorandum accepts the source used for an actual conversion. Keep the statement and the rate source, and apply the same method every year. If you pay after the invoice date, the rates on the two dates can differ. The folio's test is the day the amount arises and does not say whether that is the invoice date or the payment date, so pick one documented method and apply it every year. Expenses paid in foreign currency covers the receipt-versus-statement choice.

Do I owe GST/HST on services bought from a supplier outside Canada?

Possibly. A buyer resident in Canada pays GST at 5% on an imported taxable supply, which is a taxable service made outside Canada (Excise Tax Act, s. 218). The definition excludes a service acquired exclusively for the buyer's commercial activities, and some services about property outside Canada (s. 217). "Exclusively" means all or substantially all, and exempt supplies are not commercial activities (s. 123(1)). So commercial use means using the service in a business that makes taxable sales (zero-rated sales count); use for exempt sales does not.

The CRA puts the line at 90%. If you buy services or intangible property from an unregistered non-resident outside Canada, you generally self-assess the GST, or the federal part of the HST, when you use them less than that in your commercial activities (CRA: GST/HST on imports and exports). Self-assessing means you work out and report the tax yourself because the supplier did not charge it. The test looks at how you use the service, not at whether you are registered.

These steps are the CRA's. A business located in Québec files GST/HST returns with Revenu Québec, unless it is a selected listed financial institution; see the provincial table below. The table is for a business that is not a financial institution: the CRA's commercial-use line is stricter for a financial institution, which also faces other import rules.

If the supplier charged you GST/HST, a different rule applies; see the next section. The supplier's own duty to register is in non-resident and digital sellers, and the return itself is in filing GST/HST and input tax credits.

What if the foreign supplier charged GST/HST: can I claim the input tax credit?

Only when a registered supplier charged it and the invoice carries the required details. The CRA tells buyers to make sure their credits include only GST/HST charged by someone registered, and points to its registry for checking (CRA: input tax credits). What the invoice must show is in GST/HST receipt details for input tax credits.

Most registrants have four years to claim. The same CRA page says a registrant buying from a non-resident registered under the simplified system must give that supplier proof of registration. Tax such a supplier collects from a registrant cannot be claimed as an input tax credit or rebate (Excise Tax Act, s. 211.17); the route is a refund or credit from the supplier. HST on ads from foreign platforms walks through that case and its time limits. Foreign VAT or sales tax is not GST/HST, so it is not an input tax credit under the GST/HST rules.

Which provincial tax applies to foreign software or services?

In the HST provinces, the provincial part of the HST may also be self-assessed, as above. British Columbia and Saskatchewan tax software bought from abroad for use there, and you remit the tax yourself if the supplier did not charge it. For other provinces, check the province's own page.

Do I withhold tax from a foreign contractor, and does it matter where the work is done?

Whether the payee is a non-resident, and where the work is done, decide the answer. Anyone paying a non-resident a fee, commission or other amount for services rendered in Canada must withhold 15% under Regulation 105 (Income Tax Regulations, s. 105). Payments, or portions of payments, for services performed outside Canada are not subject to it (CRA circular IC75-6, paragraph 32).

For a contract covering work inside and outside Canada, the payer and the non-resident must reach and document a reasonable allocation. Without one, the CRA recommends withholding on the whole payment (IC75-6, paragraphs 32 to 34). GST/HST charged on the fee is not part of the amount withheld on (paragraph 23).

The payee's residency, not the address on the invoice, decides who counts as a non-resident. IC75-6 lists a foreign address on the contract and a request for payment in a foreign currency as signs to ask about residency, and says to withhold if there is doubt (paragraph 9).

When withholding applies:

• Remit it so the CRA receives it by the 15th day of the following month, through a payroll program account (CRA: T4A-NR guide).
• A tax treaty alone does not let you skip it; relief comes through the CRA's waiver process (IC75-6, paragraph 57). The non-resident applies on Form R105, ideally 30 days before the work or first payment, and you withhold until you hold the CRA's letter. The Canada–U.S. treaty also caps the rate for some individuals. See withholding on services in Canada.
• A payer that fails to deduct and remit is liable for the whole amount with interest and penalties (IC75-6, paragraph 41). The CRA can also assess a penalty of 10% of the tax not deducted, and 20% where an earlier penalty was payable in the same calendar year and the later failure was knowing or grossly negligent (Income Tax Act, s. 227(8)). The CRA can assess these amounts at any time (s. 227(10)).
• When a corporation fails to withhold, its directors at that time can be personally liable with it for the tax, interest and penalties, subject to collection conditions and a due-diligence defence (Income Tax Act, s. 227.1). Recovery must start within two years after the director last ceased to be a director.
• Work done in Québec can also require separate Québec income-tax withholding of 9%, subject to Revenu Québec's exceptions; a federal waiver does not cover it (Revenu Québec).

Not every payment to a non-resident is a service fee. Rent and royalties follow a different rule, with a default rate of 25% that a tax treaty can reduce (CRA: Non-Residents and Income Tax). A management or administration fee paid to a non-resident you do not deal with at arm's length, such as your own overseas company or a foreign parent, can carry the same 25% tax even when the work is done outside Canada (Income Tax Act, s. 212(1)(a)). Two exclusions apply (s. 212(4)): a service an arm's-length non-resident performs in the ordinary course of its own business for a fee, and a reasonable payment for a specific expense the non-resident incurred in a service for your benefit, even between related parties. Whether a software, design or content licence counts as a royalty depends on the contract and the rights granted. For a US contractor, see paying US contractors.

Do I issue a slip to a non-resident contractor?

For services performed in Canada, yes: the T4A-NR, the CRA slip for payments to non-residents for services provided in Canada. It is due by the last day of February after the payment year, even when a waiver was granted, and amounts are reported in Canadian dollars (CRA: T4A-NR guide; IC75-6, paragraph 42).

How do I book processing fees and platform fees on a foreign invoice?

Book the contractor's fee and each fee charged by a platform, bank or card as separate lines, each in the expense or asset account that fits it. Fees that relate to buying or building an asset can be part of its capital cost (CRA: capital cost). Each is a separate purchase from a separate supplier, so each gets its own GST/HST test and provincial tax check.

Set each foreign supplier up with its country, currency and GST/HST status. Record each invoice in its own currency and in Canadian dollars at the rate source you chose, and attach the invoice, contract and proof of payment to the entry.

• A platform's service fee is the platform's own service to you. If the platform is outside Canada, run it through the self-assessment rules above. If it charged GST/HST, run it through the input tax credit rules.
• A contractor paid through a platform: the withholding test still follows where the work was done, even if the money goes to someone else (IC75-6, paragraph 6). Read the platform's terms and keep its statement showing how each payment was split.
• A bank or card conversion charge: keep it on its own line. Whether the statement's rate is acceptable is the exchange-rate question above.

What if I have paid overseas contractors for years without any of this?

Sort the payments, because the answer differs by payment, not by year. For each year, list supplier, amount, currency, date, where the work was done and whether the supplier charged tax. Then mark four groups:

1. Work done wholly or partly in Canada: withholding and a T4A-NR may have been due.
2. Payments for a licence or right to use something, or fees to a related company abroad: the Part XIII question applies.
3. Services from unregistered suppliers where your commercial use may be below the GST/HST line.
4. Software or computer services bought for use in B.C. or Saskatchewan.

Late or missing T4A-NR slips can bring separate penalties (CRA: T4A-NR guide). The CRA can generally assess GST/HST net tax up to four years after the later of the return's due date and its filing date, with statutory exceptions (Excise Tax Act, s. 298). If GST/HST was filed without self-assessment, how to correct it depends on the amount and period; see correcting a filed GST/HST return.

If you are considering a voluntary disclosure, it has to be made before the CRA starts an audit or investigation on the same information (CRA: VDP eligibility); see reviews, audits and voluntary disclosure. If invoices are missing, start with rebuilding books from bank statements.

Example

These examples are illustrative. Invoice amounts are in the currency stated; deductions are in Canadian dollars.

A developer working wholly abroad

A Vancouver corporation with only taxable sales pays a developer in Ukraine US$12,000 in two payments of US$6,000. All the work is done outside Canada. Each invoice is dated and paid on the same day. The Bank of Canada rate is 1.40 on the first date and 1.35 on the second.

• Cost: 6,000 × 1.40 = C$8,400, plus 6,000 × 1.35 = C$8,100, so C$16,500. If the fees are an ordinary business cost, that is the deduction. If they buy software the corporation keeps as an asset, it is a capital cost, claimed over time.
• No Regulation 105 withholding and no T4A-NR, because no work was done in Canada.
• The corporation uses the service entirely in taxable activity, so it does not self-assess GST/HST under the 90% commercial-use rule.
• The deduction rests on the contract, the invoices, proof of each payment and the delivered work. B.C. PST is a separate check: software written solely for the corporation is exempt for its own use.

A company with mostly exempt sales

An Ontario company registered for GST/HST makes 80% exempt sales and 20% taxable sales. It buys C$20,000 of software development from an unregistered supplier overseas, with the work done outside Canada.

• Assume it uses the service only in Ontario, uses it 20% in commercial activities (below the 90% line), and is not a financial institution. It self-assesses the federal part, 5% × C$20,000 = C$1,000, reported on line 405 in the period the amount was paid or became payable.
• Ontario is a participating province and the use there is at least 10%, so it also self-assesses the provincial part: 8% × C$20,000 = C$1,600. Total self-assessed: C$2,600.
• It can then claim an input tax credit for the commercial share: 20% × C$2,600 = C$520, leaving C$2,080 of the tax unrecovered.
• No Regulation 105 withholding applies, because the work was done outside Canada.

Part of the work done in Canada

An Edmonton firm hires a consulting corporation based outside Canada for a C$40,000 project. Ten of the 40 working days are spent in Alberta. The firm and the consultant agree in writing that 10 of 40 days, or C$10,000, is the Canadian share.

• Unless the CRA has granted a waiver, the firm withholds 15% × C$10,000 = C$1,500 and pays the consultant C$38,500. It remits the C$1,500 by the 15th of the following month.
• It reports the C$10,000 Canadian portion and the C$1,500 withheld on a T4A-NR by the last day of the following February.
• Without a written allocation, the CRA recommends withholding on the full C$40,000: C$6,000.
• Days are one way to allocate. The standard is a reasonable allocation.

Different for you?

• You have paid overseas suppliers or contractors for years, or in large amounts, with no GST/HST self-assessment or withholding review: which rules apply to each payment, and how to correct returns already filed, depends on dates and facts. See bookkeeping help.
• A contractor did part of the work in Canada: withholding, the allocation and the T4A-NR are your duties as payer. See withholding on services in Canada and get bookkeeping help to document the split.
• The CRA has asked about your claims: gather the invoices, contracts and proof of payment first. See GST/HST reviews and audits, and bookkeeping help for organising the records.
• Your contractor is in the US: see paying US contractors from a Canadian corporation.
• Your contractor works like an employee: see contractor or employee in Canada.
• You are in Québec, Manitoba or another province with its own sales tax, or the work was done in Québec: see provincial sales tax by province.
• Your books are behind: see catching up on overdue books and bookkeeping help.