Paying US Contractors from a Canadian Corporation

Which forms and withholding apply to a US contractor?

For US-only work, Canada generally requires no Regulation 105 withholding or T4A-NR. Ask for a W-9 and check Form 1099-NEC. Canadian work can trigger withholding and a T4A-NR (CRA: T4A-NR guide; IRS: general instructions).

Does a Canadian corporation send Form 1099-NEC?

Yes, it may. IRS instructions give non-US payers generally the same reporting duties as US payers. Their exception covers a foreign-source payment paid and received outside the US; US work generally produces US-source income regardless of payer or payment location (IRS: service-income source).

If Form 1099-NEC is due, get an IRS employer identification number (EIN). File and furnish it by January 31 after the payment year, adjusted for weekends or holidays (IRS: general instructions; IRS: Form 1099-NEC instructions).

Should the corporation collect Form W-9?

For potentially reportable US-person payees, request a signed W-9 or substitute. It supplies name, taxpayer number, and tax classification; retain it. It also documents US status when no Form 1099 is due (IRS: W-9 requester instructions).

Match the invoice payee to the W-9, including an LLC's tax classification. Foreign persons use the appropriate Form W-8 or Form 8233 (IRS: W-9 requester instructions).

US federal income-tax withholding generally does not apply to contractor pay, but a missing taxpayer number on a reportable payment can trigger 24% backup withholding (IRS: W-9 requester instructions).

Does the corporation issue a T4A or T4A-NR?

For a US-resident contractor's work entirely outside Canada, generally issue neither slip. A T4A-NR reports non-residents' services performed in Canada, whether paid to an individual, partnership, or corporation, regardless of amount or tax withheld (CRA: T4A-NR guide).

For Canadian services, furnish a T4A-NR and file the return by the last day of February after the calendar year (next business day if weekend). Report Canadian dollars even for US-dollar payments (CRA: T4A-NR guide). See T4A rules for Canadian contractors.

When must the corporation withhold Canadian tax?

Regulation 105 requires 15% withholding from non-resident service fees and commissions for work in Canada, regardless of currency or payment location (Income Tax Regulations, section 105). It applies to the gross Canadian-service fee and is not final tax. CRA excludes qualifying reasonable transportation, lodging, and meals; report them separately on the T4A-NR (CRA: IC75-6R2, paragraphs 24–26).

When a contract covers work on both sides of the border, allocate the fee reasonably and document the allocation in the contract or related records. The CRA says payments for work outside Canada are outside Regulation 105; without a documented allocation, it recommends withholding on the total service payment (CRA: IC75-6R2, paragraphs 32–33).

Use a CRA payroll program account to remit the deduction so the CRA receives it by the 15th day of the following month. A treaty claim alone does not cancel withholding: the non-resident or an authorized representative should send Form R105 at least 30 days before Canadian services or the first payment, and the payer needs the CRA's written approval before reducing the deduction. A later waiver covers only later payments (CRA: IC75-6R2). See withholding on services in Canada for the waiver process.

If the corporation fails to deduct, Income Tax Act section 227 makes it liable for the missing tax, interest, and a 10% penalty. A later knowing or grossly negligent failure in the same year can raise the penalty to 20%; tax withheld but not remitted remains payable. Section 227.1 can also make directors at the time jointly liable, subject to its collection conditions and due-diligence defense. Recovery proceedings must start within two years after a director leaves.

Can a US sales agent create a US permanent establishment?

Yes. Under Article V of the Canada-US treaty, a person acting in the US for the corporation can create a permanent establishment if the person has, and habitually exercises there, authority to conclude contracts in its name. An independent agent acting in the ordinary course of business is treated differently.

Record who negotiates terms, who accepts orders, and whether the corporation can genuinely reject them. A commission label or contractor agreement does not answer the treaty question. A permanent establishment can let the US tax profits attributable to it under Article VII; see Canadian corporation US tax return for the filing consequences.

What records support the contractor expense on the T2?

Keep proof that the expense earned business income and was reasonable (Income Tax Act sections 18 and 67; CRA: business records).

Keep the agreement, invoices, payment records, W-9, deliverables, and work locations. For an agent, keep commission calculations and contract approvals. For Canadian work, retain the allocation, waiver, remittance, and T4A-NR. See recording US-dollar transactions.

What if the contractor works like an employee?

The working relationship determines the classification, not the agreement's title. The IRS looks at the payer's right to control what the worker does and how the work is done; employees may trigger wage reporting and payroll withholding instead of Form 1099-NEC (IRS: independent contractor or employee).

Review someone working company-set hours, under detailed direction, or as regular staff. State or provincial employment rules may also apply. For an employee across the border, use the cross-border hiring guide.

Example

Illustrative amounts are in US dollars.

A designer works only from Oregon

A US designer invoices US$20,000 for work done in Oregon. The Canadian corporation has no Regulation 105 withholding or T4A-NR for that work. It collects a signed W-9 and keeps the invoice and payment record. It also checks Form 1099-NEC: the US work is US-source, and the payment exceeds the reporting threshold for a nonexempt payee.

The designer spends two weeks in Toronto

Instead, the designer performs US$5,000 of the US$20,000 project in Toronto and US$15,000 in Oregon. The corporation documents the split and withholds 15% × US$5,000 = US$750 unless it received a CRA waiver before payment. It remits the deduction and issues a T4A-NR for the Canadian work. It still checks US reporting for the designer.

A sales agent signs US orders

A US sales agent earns a US$10,000 commission and routinely signs customer contracts in the Canadian corporation's name. That authority may create a US permanent establishment even though the agent is called a contractor. The corporation reviews the treaty position and its US filing obligation, along with Form 1099-NEC reporting.

Different for you?

• Your contractor also works in Canada: see Regulation 105 withholding and waivers.
• Your payee is resident in Canada: see reporting payments to subcontractors.
• You need the worker as an employee: see hiring an employee across the border.
• Your US agent can bind the corporation: see Canadian corporation US tax return and get bookkeeping help to organize contracts, payments, and work-location records before filing.
• A US business pays a contractor in Canada: see paying contractors abroad.